Is 2024 the Year for Utilities Stocks? 3 Top Sector Picks

Stocks to buy

It was an ugly year for utility stocks. The rapid rise in interest rates by the Federal Reserve caused a drag on utility earnings. Utility borrowing costs rise because they are capital-intensive and rely heavily upon debt financing. Utilities end up taking a hit on earnings. Also, income investors sour on utilities as bond rates look more attractive. That doesn’t mean there aren’t top utilities sector picks to consider.

While last year was a bust, can 2024 be better? There are reasons to think so. The Fed will likely cut rates this year, possibly three times or as many as six. That might be aggressive, but a falling rate environment suggests utility stocks might be a good investment now. Here are three top utilities sector picks you will want to add to your portfolio today.

Brookfield Infrastructure Partners (BIP)

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Brookfield Infrastructure Partners (NYSE:BIP) is not your typical utility stock. It is one of the largest owners and operators of critical global infrastructure networks. Yes, that includes traditional utility operations, but it extends to railroads, toll roads, ports, data centers, data transmission assets and two semiconductor manufacturing foundries. 

Its diversified portfolio of critical assets explains why it held up better than most other utility stocks. BIP stock managed to eke out a 1.6% gain last year. It’s not world-shattering but better than the losses other utilities offered. 

Brookfield engages in a cycle of selling mature assets and reinvesting in better, higher-return opportunities. It calls the strategy “buy, enhance, sell, repeat.” Yet regardless of whether they are new or old assets, all the businesses tend to have the common denominator of producing stable, reliable cash flows. No matter the market, long-term contracts and regulated frameworks underpin 90% or more of their funds from operations.

The diversified infrastructure play pays a dividend that yields 5% annually. It targets annual dividend growth of 5% to 9% and reinvests leftover retained cash flows into new expansion projects. With a safe, well-covered payout, Brookfield Infrastructure Partners is poised to capture greater growth as interest rates fall.

Consolidated Edison (ED)

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Consolidated Edison (NYSE:ED) is a more traditional electric utility, one of the largest publicly traded energy-delivery companies. It provides electricity, natural gas and steam to 10 million customers in New York state. ConEd, as it’s known, has been in business for 200 years, paid a dividend for 100 years and has increased the payout every year for 50 years. That makes it a Dividend King. The dividend yields 3.7%.

Although ConEd got into the renewable energy business, it sold those operations to RWE Renewables Americas (OTCMKTS:RWEOY) for $6.8 billion. The deal freed the utility from issuing equity to finance its expansion plans. The proceeds also allowed it to pay down debt, invest further in its core utility operations and add to clean energy transmission projects, battery storage, electric vehicle infrastructure and other renewable power generation projects.

The utility stock envisions investing $72 billion over the next decade in its core operations, as well as in clean energy and so-called climate resilience to insulate its business from the purported effects of climate change.

Investing in Consolidated Edison means investing in a growing income stream from a solid company expanding its energy generation opportunities.

York Water (YORW)

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Even older than ConEd, Pennsylvania water utility York Water (NYSE:YORW) has been in business for 207 years. It’s also paid a dividend every step of the way. No stock on the market in any industry has paid a dividend longer than this water stock. It’s a sleepy, under-the-radar utility serving almost 50 municipalities in south-central Pennsylvania.

While you shouldn’t expect utilities to turn on their afterburners and rocket higher, don’t count out York Water. Over the past 23 years, the water company’s total return has exceeded that of the S&P 500 by three to one. York Water generated over 1,200% returns for investors since the turn of the century compared to 400% returns by the index.

What you get from York is a patient, steady grower. It increases sales by adding more customers to its portfolio but more commonly grows through rate increases approved by regulators. An investment is almost guaranteed because clean water and wastewater treatment are necessary. Regulators may delay rate hikes but ultimately must approve them to allow the utility to invest in maintenance, upgrades and expansion. 

York Water’s dividend yields 2.3% annually, and this top utility sector stock pick has increased the payout for 26 consecutive years. If it were a component of the S&P 500, that would qualify it as a Dividend Aristocrat, but it’s an income-producing champion nonetheless.

On the date of publication, Rich Duprey held a LONG position in ED stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.

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