The 20% Rise in Utilities: The Best High-Yield Stocks You Can Still Buy

Utilities have stepped on the gas over the past year. A good barometer for the growth of the sector is the growth in The Utilities Select Sector SPDR ETFwhich has increased by 21% in the last 12 months. Several factors helped energy utility stocks, including the prospect of lower interest rates and accelerating energy demand from catalysts like AI data centers.

Despite this increase in strength, several utility stocks still look like attractive investments today, especially for those looking for a high dividend yield. Black Hills Corporation (BKH 0.15%), Duke Energy (DUK 0.27%)and Xcel Energy (XEL 0.80%) note a few Fool.com contributors for their above-average dividends. Here’s why I think these utilities are some of the best in the industry to buy right now.

Black Hills is hard to beat on the dividend front

Reuben Gregg Brewer (Black Hills Corporation): When it comes to utilities, most investors probably won’t know the name Black Hills. This makes sense given its modest market cap of $4 billion. However, this small electric and natural gas utility has accomplished something that few other utilities have: It has increased its dividend annually for more than five decades. That makes Black Hills a high-elite dividend king. You don’t build a dividend record like this by accident.

Black Hills serves 1.3 million customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota and Wyoming. Customer growth in its regions is expanding at nearly three times the rate of U.S. population growth. That’s good. However, the company is more leveraged than many of its peers, which was a negative while interest rates were rising. This sent the company’s shares lower and pushed the dividend yield toward the upper end of the recent yield range. The yield of around 4.4% is still historically attractive, even after a rally in the stock market driven by expectations that interest rates will fall.

BKH data by YCharts

But what will the future hold for us from here? Management expects earnings growth of 4% to 6% annually through 2028, driven by a five-year capital investment plan of approximately $4.3 billion. The dividend is likely to grow with earnings over time. So you get a relatively high dividend yield — the average utility is 3% — along with a reasonable dividend growth rate and a Dividend King utility with a growing business. That should be a pretty attractive combination for most conservative dividend investors.

This utility’s growth plans should mean higher dividends

Neha Chamaria (Duke Energy): Duke Energy’s dividend yield of 3.6% isn’t among the highest in the utilities sector, but the stock has been one of the best performers in recent years, even more so when dividends are factored in. In just the last 10 years, for example, investors who held Duke Energy stock and reinvested dividends all the time doubled their money. Duke Energy has a simple strategy: Continue to upgrade and expand its infrastructure to win regulatory approvals to raise base rates at regular intervals, and use all that cash flow to further reinvest and reward shareholders . So far, Duke Energy has not disappointed its shareholders and is unlikely to.

DUK data by YCharts

Duke Energy plans to invest $73 billion between 2024 and 2028 to upgrade its 300,000 miles of power lines, build new power generation capacity and modernize its natural gas distribution network. The company believes capital spending should boost its adjusted earnings per share by 5% to 7% annually through 2028 and allow it to pay higher dividends year over year.

To be fair, the pace of Duke Energy’s dividend growth hasn’t been all that great, but as long as any dividend growth is supported by higher earnings and cash flow, it should propel the stock price over the long term. We’ve already seen this happen with Duke Energy stock.

Duke Energy’s dividend also looks safe and reliable for two reasons. First, the company is one of the largest utilities in the US and operates in some of the fastest-growing states, such as Florida and the Carolinas. This also means that there is a strong potential to expand the customer base. Second, Duke Energy targets a dividend payout ratio of 60% to 70%, which means the company will always have some money to pay down debt and fund growth, even during tough times. With management already ensuring future growth with its $73 billion capital spending plan, it’s never too late to buy and own this utility stock.

Strong total return potential

Matt DiLallo (Xcel Energy): Shares of Xcel Energy are up more than 25% over the past six months. However, the electric and gas utility is still an attractive investment these days. Even with this increase in power, it trades at about 17.5 times that anticipated earnings. That’s well below the 20 or so forward earnings that most utilities get these days. It is also much cheaper than S&P 500is 23.5 times forward earnings.

The company’s relatively more attractive valuation is why it offers a higher dividend yield of 3.5%, more than double the S&P 500’s yield of under 1.5%. Xcel Energy has increased its payout for 21 consecutive years. It has grown its dividend at a compound annual rate of over 6% over the past decade.

Xcel Energy should have enough strength to continue growing its dividend going forward. The companywhich operates four electric and gas utilities in eight Western and Midwestern states, it expects to invest at least $39 billion over the next five years in maintaining and expanding its operations. Meanwhile, it sees the potential to invest $5 billion over that period to support growing energy demand. This forecast leads to his view that he can grow his earnings per share by 5% to 7% annually.

Utility he believes it it could increase its dividend at a similar rate given its reasonable payout ratio of 50% to 60% of its stable earnings. Add the current yield to the earnings growth rate and Xcel Energy could generate total annual shareholder returns in the 9% to 11% range. Exist on top at that if the company’s valuation is closer to that of its peers in the utilities sector. That’s a solid return from such a low-risk, high-yielding dividend stock.