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3 Utilities Stocks That May Weather the Storm

Inflation and other factors dim the allure of this dividend-rich sector today, but these stocks may be resilient.

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The following is an excerpt from the video series Dividend-Stock Deep Dive, hosted by Morningstar DividendInvestor editor David Harrell. Watch the full interview.

Harrell: In your report, you highlighted a handful of the companies under your coverage--three that you thought were somewhat well insulated, at least relative to the rest of your coverage list from higher inflation and then three that seemed particularly vulnerable to you right now. Can you discuss these?

Miller: In terms of those best protected--and again, I've to say, no utilities are well protected from inflation. This is across the board and negative, right? But if you are looking for utilities and you want to look for something that might weather the storm, so to speak, better than others, look for utilities with constructive regulatory environments, places where regulators have supported policies that allow utilities to pass through those higher costs to customers. Look for places where they have low energy costs. There's a wide range of energy costs across every state, region in the U.S., places where energy costs are very high for various reasons, very low for various reasons. Look for utilities in places with low energy costs. Those, all else equal, will keep customer bills lower.

And then, you're also looking for utilities that have different types of growth programs. There are a lot of ways utilities can invest capital. They can invest in maintenance. They can invest in the green. So, they put a lot of stuff in that bucket--renewable energy, clean energy, energy efficiency. Or they can invest in large power plants that may be natural gas or coal, maybe not as environmentally friendly. What we're doing is looking for utilities with constructive regulation, with good projects--and I put good in terms of support for projects--and then energy costs.

So, three names: Dominion Energy (D), Entergy (ETR)

Dominion Energy is in the Virginia area. So, they have a very constructive and 100% renewable energy target in Virginia. So, a lot of political momentum to support investment. 

Entergy is in the Southeast. So, you think about what's going on in the southeast right now--huge demand for energy, not just from the U.S., but globally. The Southeast complex, industrial, oil, petroleum products, a lot of electricity demand down there. Entergy is at the center of that, and there tends to be pretty low energy costs down there. So, those are the two primary ones.

Wisconsin Energy, or WEC Energy Group (WEC), that's another one where there's not as many great drivers, not like Entergy and Dominion, but they do have an excellent regulatory construct in Wisconsin. They have relatively low energy prices and some decent support for renewable energy.

David Harrell does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.