Even with inflation, utilities can offer investors a way to make steady income.
A period of high inflation may seem like an odd time to be talking about investing in utilities. After all, their revenue is generally fixed but their costs can vary widely. Still, the sector has outperformed the market over the past three months, losing just 4% compared with the S&P 500's roughly 10% loss. They also pay dividends, and pretty decent ones at that. "Utilities remain one of the few attractive options for income investors," Morningstar analysts said in a Jan. 26 report. "Utilities' 3.2% dividend yield remains historically attractive relative to interest rates, offering plenty of yield protection for investors even if interest rates rise." But dividends aren't everything, and sometimes it may be wise to pick a utility with a lower payout if it's a stronger company. Here's a look at five solid utilities and their dividends as of Wednesday's close.
NiSource Inc. (ticker: NI)
Morningstar analysts say higher consumer spending, supply constraints and higher energy prices that are driving inflation should be short-lived. "If interest rates can hit a sweet spot that tames inflation without alienating income investors, utilities are well positioned to produce another year of 7% to 9% total returns, given attractive dividend yields and infrastructure growth," they say. That's the case with NiSource, which the analysts see growing earnings at 8% per year because of regulatory support and investments over the next four years to transition from coal to renewable energy.
Dividend yield: 3.3%.
Edison International (EIX)
Edison International's management raised its dividend for this year, and Morningstar expects that to continue. Over the next five years, the analysts expect Edison to average 6% earnings growth because of its electric-only business, recent regulatory wins and billions in investments planned. "Edison offers a triple play of value, growth and income," they say. "Edison has stakeholder support in California to harden the grid against natural disasters, integrate renewable energy, invest in utility-scale energy storage and support electric vehicle adoption." Further, like NiSource, the analysts see Edison International trading below fair value estimates.
Dividend yield: 4.7%.
Entergy Corp. (ETR)
Although Entergy has lagged behind its peers since 2020, Morningstar analysts see three key advantages for the utility: a growing service territory, "constructive" regulation and growth potential for renewable energy investments. "We expect $4 billion of annual investment through 2025 to upgrade its expansive grid and replace coal generation with mostly solar," the analysts say. "This supports our annual earnings growth estimate at the high end of management's 7% to 9% target." The utility should be able to raise customer rates to cover higher financing costs for investments in clean energy, among other things, they say.
Dividend yield: 3.9%.
NextEra Energy Inc. (NEE)
By the end of this decade, Morningstar analysts think solar generation will surpass that of wind because of improving project economics, tax benefits, more efficient panels and widespread adoption of battery storage. NextEra energy looks to be a beneficiary of this, with the analysts pointing to solar investments in Florida as well as battery storage investments. "A January sell-off has slashed NextEra's premium valuation, but ... the granddaddy of U.S. renewable energy has no plans to slow down," they say. "Constructive regulation in Florida supports industry-leading returns and growth."
Dividend yield: 2.2%.
Duke Energy Corp. (DUK)
Higher interest rates may even benefit utilities by reducing the risk that regulators will slash the returns on investments they allow from power generating companies, the Morningstar analysts say. And utilities have enough investment opportunities to offset earnings pressure from higher interest rates. Over the next five years, the analysts expect Duke Energy will spend $60 billion on capital projects, paving the way for 6% annual earnings growth. Duke stands to benefit from favorable regulation in Florida and recent legislation in North Carolina, the analysts say.
Dividend yield: 4%.
Morningstar analysts say higher consumer spending, supply constraints and higher energy prices that are driving inflation should be short-lived. "If interest rates can hit a sweet spot that tames inflation without alienating income investors, utilities are well positioned to produce another year of 7% to 9% total returns, given attractive dividend yields and infrastructure growth," they say. That's the case with NiSource, which the analysts see growing earnings at 8% per year because of regulatory support and investments over the next four years to transition from coal to renewable energy.
Dividend yield: 3.3%.
Edison International (EIX)
Edison International's management raised its dividend for this year, and Morningstar expects that to continue. Over the next five years, the analysts expect Edison to average 6% earnings growth because of its electric-only business, recent regulatory wins and billions in investments planned. "Edison offers a triple play of value, growth and income," they say. "Edison has stakeholder support in California to harden the grid against natural disasters, integrate renewable energy, invest in utility-scale energy storage and support electric vehicle adoption." Further, like NiSource, the analysts see Edison International trading below fair value estimates.
Dividend yield: 4.7%.
Entergy Corp. (ETR)
Although Entergy has lagged behind its peers since 2020, Morningstar analysts see three key advantages for the utility: a growing service territory, "constructive" regulation and growth potential for renewable energy investments. "We expect $4 billion of annual investment through 2025 to upgrade its expansive grid and replace coal generation with mostly solar," the analysts say. "This supports our annual earnings growth estimate at the high end of management's 7% to 9% target." The utility should be able to raise customer rates to cover higher financing costs for investments in clean energy, among other things, they say.
Dividend yield: 3.9%.
NextEra Energy Inc. (NEE)
By the end of this decade, Morningstar analysts think solar generation will surpass that of wind because of improving project economics, tax benefits, more efficient panels and widespread adoption of battery storage. NextEra energy looks to be a beneficiary of this, with the analysts pointing to solar investments in Florida as well as battery storage investments. "A January sell-off has slashed NextEra's premium valuation, but ... the granddaddy of U.S. renewable energy has no plans to slow down," they say. "Constructive regulation in Florida supports industry-leading returns and growth."
Dividend yield: 2.2%.
Duke Energy Corp. (DUK)
Higher interest rates may even benefit utilities by reducing the risk that regulators will slash the returns on investments they allow from power generating companies, the Morningstar analysts say. And utilities have enough investment opportunities to offset earnings pressure from higher interest rates. Over the next five years, the analysts expect Duke Energy will spend $60 billion on capital projects, paving the way for 6% annual earnings growth. Duke stands to benefit from favorable regulation in Florida and recent legislation in North Carolina, the analysts say.
Dividend yield: 4%.
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