Best Electric Utility Stocks to Buy in 2023 | The Motley Fool

Electric utility stocks are publicly traded companies regulated by government agencies. They make money by providing reliable energy to customers. Here’s a closer look at how to invest in the electric utility industry.

Several publicly traded companies operate electric utilities, giving investors lots of options in this sector. Three that stand out as being among the best in the electric utility sector are:

Duke Energy

Duke Energy (NYSE:DUK) is one of the largest power company stocks in the country. It operates three business segments:

• Electric utilities and infrastructure: Operates regulated utilities that serve 7.9 million retail electric customers in North Carolina, South Carolina, Florida, Indiana, Ohio, and Kentucky.
• Gas utilities and infrastructure: Distributes natural gas to 1.6 million customers across North Carolina, South Carolina, Tennessee, Ohio, and Kentucky.
• Commercial renewables: Operates wind and solar energy facilities across the U.S., as well as energy storage and microgrid projects.

Duke Energy’s portfolio of utilities generates steady revenue, regulated by the government agencies that set its rates. Meanwhile, its nonregulated renewable energy business also produces stable cash flow. This business sells the power it produces to other utilities and end users under long-term, fixed-rate contracts known as power purchase agreements (PPAs).

A couple of factors help Duke Energy surpass many electricity stocks. For starters, it complements its steady revenue-generating energy businesses with a strong financial profile (including an investment-grade credit rating). It also has a conservative dividend payout ratio, giving it the flexibility to invest in cleaner energy.

It’s worth noting that an activist investor started pressuring the giant utility to break itself into three electric power companies in mid-2021. However, Duke believes it has the right strategy to create shareholder value. Its slate of expansion-related investments position the power company to expand its earnings per share at a 4% to 6% annual rate through 2024. Add that steady growth to Duke’s dividend, and investors could enjoy attractive total returns.

NextEra Energy

NextEra Energy (NYSE:NEE) is one of the largest electric utilities in the country. It owns electric utilities in Florida that serve roughly 5.6 million customer accounts. NextEra also operates an energy business that generates and sells electricity under long-term PPAs. The company claims to be the world’s largest generator of renewable energy from the wind and sun.

NextEra Energy has all the qualities an investor would want in an electricity stock. It routinely has one of the highest credit ratings among large, rate-regulated electric utilities. It also typically has a lower-than-average dividend payout ratio. That gives NextEra the financial flexibility to invest in cleaner energy while building more renewable power projects.

NextEra’s current slate of investments should expand its earnings by 6% to 8% annually through 2023. That could power dividend growth of 10% per year through at least 2022, which is above-average growth for the sector. It could help NextEra generate industry-leading total stock returns.

Meanwhile, there’s more upside potential to that forecast. If the Biden administration pushes forward with its plan to accelerate renewable energy investment, it could supercharge NextEra’s growth potential. For example, the administration sees the potential for solar to supply 40% of the country’s electricity needs by 2035. That implies the U.S. needs to quadruple its solar deployment in the coming years. As an industry leader, NextEra would be a big beneficiary of this solar push.

Xcel Energy

Xcel Energy (NASDAQ:XEL) operates four electric and natural gas utilities across eight states in the central U.S. These utilities serve 3.7 million electric customers and 2.1 million natural gas customers. Those energy businesses generate predictable rate-regulated revenue.

Xcel Energy’s excellent qualities include an investment-grade balance sheet and a conservative dividend payout ratio. Its strong financial profile gives it the flexibility to invest in high-return expansion opportunities such as replacing coal-fired power plants with wind power.

The company believes these investments can transform it into a cleaner electric utility. Further, they should help to increase its earnings and dividends per share by 5% to 7% annually. That steady growth should give Xcel Energy the power to produce attractive total shareholder returns. Meanwhile, NextEra, Duke, and Xcel Energy are all likely to benefit from any government-powered acceleration in renewable energy investment in 2021 and beyond.