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3 Utilities Picks for Dividend Seekers

Prices for the highest-quality utilities remain rich, but there are pockets of value to be found.

Utilities closed out 2020 as the second-worst-performing sector behind energy--and therefore entered 2021 with a much more attractive investment proposition from a valuation standpoint. In addition, the sector’s 3.3% average dividend yield remains exceptionally attractive relative to ultralow interest rates. Today we’re looking at three reasonably priced utilities stocks that our analysts like.

FirstEnergy's (FE) shares fell 30% in July 2020 and have not recovered following the arrest of the Ohio House Speaker and four others on racketeering charges. Although no FirstEnergy executives have been charged, and FirstEnergy no longer owns the entity that benefited from the alleged bribery, we expect it will have to repair regulatory and political relationships in Ohio, which represents less than 20% of earnings. FirstEnergy's underlying businesses are solid. As the bribery headlines and COVID-19 issues fade, we estimate 4.8% annual earnings per share and dividend growth.

Edison International (EIX) offers a triple play of value, growth, and income. California political risk will always be a concern for Edison. However, California’s progressive energy policies also create more growth opportunities than most other U.S. utilities. Edison’s electric-only business, recent regulatory success, and $5 billion annual investment plan give us confidence that it can grow earnings 6% beyond 2020. Management recently raised the dividend 4% and we expect that pace to pick up. Edison has stakeholder support to harden the grid against natural disasters, integrate renewable energy, and support electric vehicle adoption.

Across much of American Electric Power's (AEP) vast service territory, states were slower than others to adopt renewable energy standards. This has resulted in slower renewable energy growth for AEP thus far. But state regulators overseeing AEP’s service territories are now embracing renewable energy development, providing significant growth opportunities beyond our five-year forecast. AEP will also benefit from investment opportunities in its transmission and distribution network, which is the largest in the U.S., as other utilities also connect renewable energy projects.

Sector director Travis Miller provided the research behind this segment.