Shop Carefully for Bargains in Utilities Stocks
The utility sector continues to climb despite rising interest rates. Older income investors, in particular, should take note.


Is it time to power up your portfolio? With their attractive dividends and tendency to hold up well when the stock market slides, utilities stocks have plenty to offer older investors. Yet enthusiasm for the sector has been dampened in recent years by fears of rising interest rates. During the long stretch of low rates, income investors used utilities stocks as bond substitutes—and as rates rise, the thinking goes, they’ll dump those shares in favor of fixed-income holdings.
But the much-anticipated utility-stock meltdown has failed to materialize. Instead of marching steadily higher, the 10-year Treasury yield climbed from 2.5% to just over 3% earlier this year and then retreated to about 2.9%. Absent a continuous rise in longer-term rates, investors decided utilities stocks aren’t so bad, after all. In the three months ending in early September, the sector climbed 11.7%, versus 3.6% for Standard & Poor’s 500-stock index.
Many utilities sport yields well above 3%, which “still looks quite attractive relative to Treasury yields and corporate interest rates,” says Travis Miller, an analyst at investment-research firm Morningstar. Although there may be short-term pain if rates rise further, Miller says that data from the past 25 years show “no relationship between utilities returns and interest rates for long-term investors.”

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What’s more, “when there’s a lot of noise from a geopolitical standpoint or from economic uncertainty, utilities tend to do better,” thanks to their safe-haven reputation, says John Kohli, manager of the Franklin Utilities Fund.
Given its recent rebound, however, the sector as a whole is not cheap, and value-minded investors will have to shop carefully for bargains.
Where to Look
Money managers and analysts say they’re finding healthy growth—and attractive income—among utilities that are updating their infrastructure. “The things that will drive utility spending going forward are transitioning from coal generation to renewables and doing grid modernization,” says Phil Sundell, a value fund manager at American Century. Such spending boosts a utility’s “rate base”—the capital invested to serve customers—which in turn helps grow earnings.
Among Miller’s favorites is Dominion Energy (D; recent price, $72; forward dividend yield, 4.6%), which has a strong position in the gas-producing Marcellus and Utica shale regions. Although the company has suffered regulatory setbacks lately, “we think its assets are among the highest quality of all U.S. utilities, and it has some of the best growth prospects because of its location in an energy-rich region,” Miller says.
Both Miller and Kohli like Duke Energy (DUK, $83, 4.5%). The company has operations in Florida, North Carolina and South Carolina, where it benefits from population growth as well as a favorable regulatory environment, Kohli says. The stock’s high dividend yield, combined with 4% to 6% earnings growth, gives investors potential total returns of close to 10%, he says.
NextEra Energy (NEE, $172, 2.6%), Kohli’s top holding, also has major operations in Florida and is a renewable-energy giant. Its businesses include Florida Power & Light, the state’s largest electric utility, and NextEra Energy Resources, the world’s largest operator of wind and solar projects. Although federal pollution rules are in flux, “states continue to move forward and are thinking longer-term” about renewable energy, Kohli says, and utilities focused on cleaner energy sources will ultimately benefit.
For those who would rather leave the utility stock-picking in the hands of a professional, the Franklin Utilities Fund (FKUTX) is a solid choice—if you can avoid the front-end load. The fund has delivered 10.5% average annual returns over the past 15 years, beating roughly 70% of peers in the utilities category, according to Morningstar.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
Retire in the Canary Islands for Beaches and Natural Beauty
Retirees enjoy Spain's Canary Islands, where life can be as hectic or chilled as you like. The one constant will be almost year-round mild weather.
-
The '120 Minus You Rule' of Retirement
The '120 Minus You Rule' updates an older retirement rule, with a twist. Here's how this approach to retirement portfolio construction can work for you.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have Today
Berkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have Today
Procter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
-
My Three-Day Rule for Investing: And If it Applies Now
Stock Market I've seen a lot in my career. Here's what I see now in the stock market.
-
Is It Time to Invest in Europe?
Stock Market Europe is being shaken out of its lethargy, militarily and otherwise, by Donald Trump's changes in U.S. policy. Should investors start buying?
-
How Can Investors Profit From AI's Energy Use?
Global energy demand is expected to grow by leaps and bounds over the next several years as AI usage accelerates. Here's how to get a piece of the pie.
-
Why Is Warren Buffett Selling So Much Stock?
Berkshire Hathaway is dumping equities, hoarding cash and making market participants nervous.
-
If You'd Put $1,000 Into Google Stock 20 Years Ago, Here's What You'd Have Today
Google parent Alphabet has been a market-beating machine for ages.
-
Stock Market Today: Stocks Retreat Ahead of Nvidia Earnings
Markets lost ground on light volume Wednesday as traders keyed on AI bellwether Nvidia earnings after the close.