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5 Best Utility Stocks to Buy for Dividends

Protect your money and get higher dividend yields with these utility stocks

With COVID cases topping 200,000 a day last week and distribution of a vaccine still at least a month away, the market could be in for a very difficult few months. It’s times like this, I’m looking for some certainty and safety in my portfolio.

And while shares of utilities have been hit this year on lower commercial demand for power, as a regulated industry, profits are about as safe as it gets and the dividend yield is among the highest in the market.

So as the uncertainty heats up on the rest of the economy, utility stocks should provide some of that safety we’re all going to need. And looking out further into next year, there is some real value locked away in the sector.

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Are Utility Stocks Safe?

The average price-to-earnings ratio on utility stocks is just over 18-times, about 14% above the long-term average but well below the premium we see in a lot of other sectors. Earnings growth in the mid-single digits combined with dividend yields twice the market average should make for a strong investment in 2021.

That’s the sector. Researching deeper into the individual stocks and I’ve found five with an average 4.7% dividend yield, almost three-times the market average and 50% above the sector average.

I’ll be putting one of these stocks into our 2021 Bow Tie Nation portfolio on Stockcard, already up 22% in the past month. I’ll be doing an update video on the portfolio next month but I’ll put a link in the video description if you want to check out our current picks. Don’t forget to use the promo code bowtienation for an exclusive discount beyond the free trial.

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Our first utility stock, Duke Energy, ticker DUK, just announced a major clean energy investment that could drive growth.

Management’s five-year capital plan is focusing on renewables with a target of net-zero methane emissions by 2030. Beyond an aggressive plan for growth, the company’s expense reduction program has been one of the best, shaving $350 million in costs through last quarter. In fact, the restructuring was enough to help the company beat earnings estimates by 4.5% last quarter even with the hit from abandoning the Atlantic Coast pipeline project.

Cost reductions achieved are 75% of total planned which would mean another $100 million-plus in savings. That should help management achieve its earnings target of $5.10 per share this year.

That puts the shares at 18-times on a price-to-earnings basis which is right around the sector average. The record hurricane season shaved ten to fifteen cents off earnings this year so, given the further cost savings, I think 2021 earnings should surprise on the upside.

The average analyst price target is just below the current price but likely gets upgraded when we see 2021 earnings estimates increased. I would expect a healthy five- to seven-percent price return along with the 4.2% dividend yield here.

I think this next utility offers not only the best dividend but also the highest price upside, FirstEnergy, ticker FE, and its 5.5% yield.

The company is a fully regulated utility with six million customers across six mid-Atlantic states and over 24,000 miles of transmission lines. Management is forecasting 10% annual transmission rate growth through 2023 and 4% annual growth for distribution.

It’s one of the most stable cash flows in utility stocks and the shares would be higher…except for the legal problems lately.

The company terminated its CEO in October and saw its bonds downgraded on governance concerns that have hit the shares. The Department of Justice has implicated FirstEnergy as the source of about $15 million in funds used by a former Ohio house speaker in a bribery case to benefit two nuclear plants.

The investigation is ongoing but I think the worst is baked in here. The outcome, good or bad, shouldn’t materially affect the company’s bottom line and the headline risk has created a super-cheap stock.

The company is expected to report $2.59 in per share earnings over the next four quarters, just slightly below the $2.62 it reported over the last year. That would put the shares at a price of just 11.2-times earnings, one of the cheapest in the sector.

The average analyst price target of almost $37 per share is more than 27% higher than the current stock price, giving FirstEnergy the highest upside in our list.

In fact, I added FirstEnergy to our 2021 Bow Tie Nation portfolio on Stockcard. We’re just six weeks into our portfolio and already beating the market by 18% with a 22% return so far.

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Consolidated Edison, ticker ED, provides services to 10 million customers mainly in New York and New Jersey but also has a solid solar business nationally.

There are some catalysts for growth here but what really attracted me to the shares was the 46 consecutive years of dividend increases by ConEd, with a yield of 3.9% currently. That’s pretty astounding especially considering even some utilities are having to pause dividend increases this year.

Fifty-six percent of the company’s electricity comes from renewables and it’s the second largest solar generator in North America.

The company owns a 12.5% interest in the Mountain Valley pipeline and 50% f the Stagecoach Pipeline, neither of which really fit with the core business. The Mountain Valley assets could get a good price in a sale, especially with the abandonment of the Atlantic Coast Pipeline recently.

ConEd is expected to book $4.40 in earnings per share over the next year, an increase of 3.5% over last year’s earnings That would mean a 17.5-multiple for its PE ratio. It’s not the lowest but still decent growth considering how the pandemic has hit power demand.

PPL Corporation, ticker PPL, is one of the larger utilities and the highest dividend of the group with a 5.7% yield.

PPL  has $46 billion in assets and international exposure with its UK business. Management announced plans to sell the UK segment to focus on its business in Pennsylvania and Kentucky. I think it’s a great move that could unlock a lot of value here.

Funds from the sale will go to strengthen the balance sheet and growth projects so the company should have ample cash for several years. Regulatory changes in the UK had really made the segment a weight on returns so an expected first half 2021 sale could see a valuation bump for the shares as well.

Right now the shares are trading for just 12-times on that PE basis so definitely some upside potential if it gets rerated around the 15 to 18-times multiple after the sale.

Southern Company, ticker SO, is the largest utility in our list at a market cap of $64 billion as well as the highest expected earnings growth.

The company services nine million customers in nine states but does most of its business in Alabama, Georgia and Mississippi. This is another one undergoing a huge transformation to renewables and just saw its largest one-year shift from coal into renewables and nuclear.

After five years of set-backs, it looks like the new Georgia nuclear plant is set to meet its late 2021 in-service dates. It won’t add to next year’s earnings but after cost overruns and the schedule, that’s going to remove a lot of the uncertainty around this stock.

Even before that plant starts adding to earnings though, Southern is expected to post the strongest earnings growth in the group. Earnings are expected to pop 6.2% next year to $3.24 per share. The growth is a little expensive at 18.8-times on a PE basis but will be worth it if the company can keep up that pace.

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Don’t pass up the chance to protect your portfolio and your profits before the long winter of COVID begins. Utility stocks offer a great opportunity for value and dividends that will keep your money safe. Look for a high dividend yield and catalysts for stock price growth in 2021.

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