This past summer, utilities were one of the best-performing stock market sectors year to date -- even better than technology. Despite a sustained rally in the S&P 500, many top utility stocks have sold off in recent months, including industry leaders like Southern Company (SO 0.36%), American Electric Power (AEP 0.49%), and NextEra Energy (NEE -0.36%).
Here's why these three high-yield utility stocks are worth buying now.
Data by YCharts.
1. Southern Company
Southern Company is a utility that mainly operates in the southeastern U.S., although it also has wind, solar, and natural gas assets across the country. Over 90% of its earnings are from state-regulated electric and gas utilities. The business model is fairly straightforward.
The utility and its subsidiaries -- including traditional electric operating companies like Alabama Power, Georgia Power, and Mississippi Power -- provide electric and gas services to customers and work with government agencies and regulators to set prices. That way, consumers aren't overcharged, but Southern Company can be compensated for its expenses and support capital investments to expand infrastructure.
Southern Company projects that its electric and gas load will increase by around 6% per year from 2025 to 2028, supporting long-term earnings-per-share growth of around 5% to 7% per year. In turn, the company will likely pass along most of that earnings growth to shareholders through dividend increases. It has a 77-year track record of paying dividends equal to or greater than the previous year and 23 consecutive years of dividend increases.
With a 3.5% yield and a 19.3 price-to-earnings ratio, Southern Company stands out as a solid value with a compelling yield.
2. American Electric Power
American Electric Power, commonly known as AEP, is a pure-play regulated electric utility. It enjoys remarkably steady earnings growth and passes most of those earnings to shareholders through dividends.
AEP services over 5 million customers in parts of Texas, Oklahoma, Arkansas, Louisiana, Tennessee, Kentucky, Virginia, West Virginia, Ohio, Indiana, and Michigan. Its diverse customer base and predictable cash flows make it an ultra-safe dividend stock. In fact, it has paid a cash dividend on its common stock every quarter since July 1910. It has also raised its dividend consistently in recent years.
As you can see in the following chart, the stock price has steadily grown over time in lockstep with its operating income and dividend payments. The company's growth comes from population increases and higher electricity demands.
Data by YCharts; TTM = trailing 12 months.
AEP isn't the kind of stock that will keep pace with a growth-fueled rally in the broader indexes, but it is an excellent choice for risk-averse investors looking to generate passive income. American Electric Power has a hefty yield of 4%, one of the highest among regulated electric utilities.
3. NextEra Energy
NextEra Energy took the utility sector by storm by aggressively investing in solar and wind energy. The company has become the largest renewable energy generator from the wind and sun through its subsidiary, NextEra Energy Resources. It also owns Florida Power & Light, the largest electric utility in the U.S.
In the 2010s, NextEra Energy produced a total return of 530%, crushing the S&P 500's 257% total return. But in the last five years, the company has produced a total return of just 33%, underperforming the S&P 500 by a wide margin and even lagging the broader utility sector.
Florida has been hit hard by natural disasters, which have challenged NextEra Energy. Higher interest rates have affected the return on investment of renewable energy projects. And the new administration in Washington may not be as supportive of renewable energy, including tax credits. The utility's net long-term debt position has ballooned to an all-time high of $80.5 billion, and its debt-to-capital ratio is around a 10-year high. With the prospect of higher interest rates for longer, interest expenses will continue hurting profitability.
Considering these factors, the sell-off in the stock is understandable, but that doesn't mean it isn't worth buying now. The company continues to grow its earnings and its project backlog at impressive rates. Management has a proven track record for project development, giving it an edge over other utilities in building out its clean infrastructure.
NextEra Energy continues to increase its dividend at an impressive pace, with three decades of consecutive annual dividend increases. The raises, paired with the languishing stock price, have pushed its yield up to 2.9%, which is closer to the sector average and considerably higher than what it has yielded in recent years.
Three safe stocks to buy now
Southern Company, American Electric Power, and NextEra Energy are easily overlooked when equity prices are soaring to new highs. But when your screen is bleeding red, they are the exact kind of companies you'll want in your corner.
All three benefit from stable cash flows and long-term prospects that should support ongoing dividend raises. They can help boost your passive income stream or supplement income in retirement.
Investors looking to round out their portfolio with income stocks they can count on should take a closer look at these three companies now.
