Utility stocks outperform
Utility stocks have shown an unusual run in 2019. The stocks have largely tracked broader markets. Including dividends, the Utilities Select Sector SPDR ETF (XLU) has returned 25% over the past 12 months, while broader markets have returned 9%.
We’ll discuss the top utilities that offer handsome upside potential based on analysts’ estimates. The utilities offer a solid total return potential due to their premium dividend yield.
Is NRG Energy attractive?
Among the three utilities we’re discussing, NRG Energy (NRG) offers the highest estimated upside for the next 12 months. However, NRG Energy doesn’t pay dividends. Edison International (EIX) and AES (AES) have an attractive total return potential along with their dividends and estimated upside. Currently, Southern Company (SO) and NextEra Energy (NEE) offer a dull upside potential based on the estimates.
Along with stable price movement, utilities generally supplement returns with steadily growing dividends. Their slower earnings growth of ~4%–5% per year enables dividend growth around similar levels. Utilities haven’t just acted as a hedge against the market downturn. They have beat broader markets over the longer term. In the last five years, utilities at large have returned 10% compounded annually—marginally higher than the S&P 500.