What are the top utility shares to watch?
Utility companies supply and maintain our daily energy and water needs. Here, we explain why people buy utility stocks, highlight some popular opportunities, and show you how to identify the highest yield utility stocks.
Why buy utility stocks?
Utility stocks are some of the most popular buy and hold stocks on the market. This is because utility stocks often offer high dividends, and they tend to outperform other securities in times of economic uncertainty.
Utility companies supply the daily energy and water needs of large proportion of the world’s population. Different utility companies provide electricity, gas and water – as well as being responsible for the maintenance of the delivery systems and production hubs.
There are a number of different options available for producing and supplying this energy including renewables, nuclear power plants, hydro-electric and tidal power, as well as fossil fuels. However, in the last decade or so, many utility companies have made an effort to shift their means of production away from fossil fuels to cleaner alternatives, after consumer awareness of the damage that fossil fuels do to the environment has increased.
Different utility companies perform different functions, so it’s important to establish some definitions for the different types of utility company:
- Energy generating companies: utility companies which produce energy or supply water to customers
- Energy network operating companies: utility companies which operate energy grids and are responsible for matching the supply of energy or water with the current demand in a given region
- Network maintenance companies: utility companies which are responsible for maintaining energy networks, wastewater networks or sewage works. These companies can also include installation as part of their services
Often, the three different definitions of a utility company can apply to one single entity, but other times a company might have chosen to specialise in one of the above – or created subsidiaries to diversify their offering.
How to trade utility stocks
Follow the steps below to place a trade on utility stocks:
- Research the company you’d like to trade
- Decide whether you’d like to go long or short
- Create a trading account
- Take steps to manage your risk
- Open, monitor and close your position
Top 10 utility stocks to watch
The below list of utility stocks has been ranked in no particular order, but each company has significant holdings and operations in the utility sector:
- Dominion Energy
- PPL Corporation
- Électricité de France S.A. (EDF)
- United Utilities
- National Grid
- British Gas
Dominion is one of the largest utility companies in the US, operating in 18 states across the country. It is headquartered in Richmond, Virginia, and it has a number of subsidiaries including Gas Infrastructure Group, Power Generation Group and Power Delivery Group.
Dominion has a large focus on water, solar, wind, natural gas and biomass methods for generating electricity to meet the utility demands of its customers – with 1.8 million homes being powered by natural gas and $979 million being invested in solar power projects between 2016 and 2019. The company also relies on coal and oil to generate power for 40% of its customers.
Dominion Energy is listed on the New York Stock Exchange under the D ticker, and its stock had a dividend yield of 4.50% at the time of writing – 18 December 2019. The below chart – as with all charts in this article – is a price graph of Dominion Energy’s stock price for a 12-month period beginning in December 2018.
FirstEnergy is an American utility company based in Ohio. The company owns one of the largest investor-owned electric systems in the US, more than 24,500 miles of transmission lines across the country and a total generating capacity of more than 5000 megawatts.
FirstEnergy is made up of ten different regulated distribution companies, which together serve over six million customers in the American Midwest and Mid-Atlantic regions. These companies include Ohio Edison, The Illuminating Company, Penn Power, Mon Power and Jersey Central Power and Light.
FirstEnergy is listed on the New York Stock Exchange under the FE ticker, and at the time of writing the company had a market capitalisation of $26 billion, and it had a dividend yield of 3.22%.
PPL Corporation provides energy and utility services to over ten million customers in both the US and the UK. As with other utility companies on this list, PPL is committed to an increased use of renewable energy generation systems as part of their supply grid. To this end, the company has committed to reducing the company’s carbon dioxide emissions by 70% from 2010 to 2050.
PPL has approximately 218,000 miles of electric lines across the US and the UK, as well as a total energy generation capacity of 8000 megawatts in the US. PPL is listed on the New York Stock Exchange under the PPL ticker. At the time of writing, the company’s stock had a dividend yield of 4.55%.
NextEra is the largest electricity utility company in the world, and it is based in the US. NextEra generates more wind and solar energy than any other utility company, and in the last decade or so, the company has made a concerted shift toward renewable energy generation. NextEra is listed on the New York Stock Exchange under the NEE ticker.
At the time of writing, NextEra Energy had a market capitalisation of $117.22 billion, and the company paid a dividend yield of 2.09%. NextEra has a number of subsidiaries including Florida Power and Light, NextEra Energy Partners, NextEra Energy Resources and NextEra Energy Services. The largest of the subsidiaries, Florida Power and Light, supplies electricity to around 10 million people in the US and is the third largest electric utility company in the US in its own right.
Électricité de France S.A. (EDF)
Électricité de France is the parent company of EDF Energy, the largest producer of low-carbon energy in the UK. It is one of the ‘Big Six’ utility companies in the UK energy sector. The Big Six are the six largest energy providers in the UK, with the others being British Gas, SSE, E.ON, Scottish Power and Npower.
EDF Energy works alongside other subsidiaries under the EDF umbrella to meet the energy needs of its customers. This includes working with EDF Renewables Group, which owns 36 wind farms and one of the largest operational battery storage units in Europe, to ensure that the energy needs of EDF Energy’s customers are met. At the time of writing, EDF had a dividend yield of 3.21%, and the company had a market capitalisation of around $30 billion. EDF is listed on the Euronext Stock Exchange under the EDF ticker.
SSE is an energy and utility company headquartered in Perth, Scotland. It trades on the London Stock Exchange under the SSE ticker, and it is also a component of the FTSE 100. SSE formerly stood for Scottish and Southern Energy, although following a rebranding in 2010 the company became known simply as SSE.
SSE is one of the Big Six utility companies in the UK, and it is responsible for generating and supplying electricity and natural gas utilities to large areas of the UK and the Republic of Ireland. SSE manages the largest energy distribution network in the UK, and it serves more than 150 locations across the country. At the time of writing, SEE paid a dividend yield of 6.71%.
United Utilities is the largest publicly listed water company in the UK, supplying water and wastewater services to over 3 million homes and 200,000 businesses in the North West. United Utilities is listed on the London Stock Exchange under the UU ticker, and it is a component of the FTSE 100.
Much of the company’s water supply comes from man-made lakes or reservoirs, which are mostly located in the British lake and peak districts. Aside from supply water to its customers, United Utilities also looks after the maintenance of its supply lines and any leaks in their network. At the time of writing, United Utilities had a 4.34% dividend yield.
National Grid is the electricity system operator for the UK, meaning it is responsible for ensuring that homes and businesses in the UK have access to however much power they need, whenever they need it. In this capacity, National Grid is also responsible for buying or selling energy depending on current demand levels in the UK.
National Grid also has operations in the North-East US, meeting the electricity and gas utility needs of over 20 million customers in Massachusetts, New York and Rhode Island. National Grid trades under the NG ticker, with a primary listing on the London Stock Exchange and a secondary listing on the New York Stock Exchange. At the time of writing, National Grid stock had a 4.99% dividend yield.
British Gas is owned by Centrica, so if you want to get exposure to the company, you’ll need to open a position on Centrica stock – which is listed under the CNA ticker on the London Stock Exchange. Centrica itself is the largest supplier of natural gas utilities to domestic UK customers, and it is also one of the UK’s largest electricity suppliers. In December 2019, Centrica had a dividend yield of 13.45%.
British Gas was privatised in 1986 after the Gas Act. Since being acquired by Centrica in 1997, British Gas has continued to provide utility services across the UK, serving around 12 million homes all over the country. This makes British Gas the UK’s biggest energy supplier and one of the Big Six utility companies in the country.
E.ON supplies energy to over 4.3 million customers in the UK, which makes it one of the UK’s leading utility companies. As with other utility companies on this list, E.ON is making an effort to move towards green energy solutions, including shifting to more sustainable forms of energy generation such as wind farms, solar power and biomass.
E.ON’s renewable project is so well-established that in 2019, the company moved all of its British customers onto renewable forms of electricity. This made E.ON the first of the UK’s Big Six utility companies to make this transition. E.ON is headquartered in Essen, Germany and it trades under the EONG ticker on the Frankfurt Stock Exchange. At the time of writing, E.ON stock had a dividend yield of 4.53%.
How to identify the best high dividend yield utility stocks
Companies can often change their dividends depending on their financial performance. A number of factors can affect this, including the current economic outlook and how well a particular sector is doing. However, utility companies tend to perform well when other companies might feel greater pressure in times of economic uncertainty.
A dividend yield is simply the ratio of a company’s annual share dividend compared to its current share price. To calculate the dividend yield, you would divide the annual dividend by the share price, and this information will tell you how much you could expect to receive back from the company for owning shares in the company outright.
As well as a dividend yield, companies will often have a pay-out ratio, which represents the amount of annual income a company will pay as a dividend to its shareholders. Above all else, pay-out ratios depend on how well a company has performed in a particular year. You can calculate the pay-out ratio of a company by dividing the total dividends by the net income, and the figure is presented as a percentage. A pay-out ratio over 100% indicates that a company is paying more in dividends than it is earning.
The dividend yield is different to the pay-out ratio because the pay-out ratio represents what proportion of a company’s earnings are paid as a dividend, while the dividend yield shows the rate of return in the form of cash dividends to shareholders.
Both the dividend yield and the pay-out ratio can help you to determine which utility stock to invest in based on expected returns, and many investors will seek to buy and hold stocks with a higher annual dividend yield or pay-out ratio.
How to invest in utility shares
Investing in utility shares is one of two ways to gain exposure to this sector, with the other being speculating on price movements by trading derivatives. Investing is different to trading because when you invest in utility shares you own them outright. You can invest in utility shares through a share dealing service, such as the one provided by IG.
Shares can be bought and sold when the exchange on which a company is listed is open. This is why it is important to know whether a stock trades on the London Stock Exchange or the New York Stock Exchange, for example.
For the London Stock Exchange, stock market hours are from 8am to 4.30pm (UK time), while for the New York Stock Exchange, market hours are between 2.30pm and 9pm (UK time). However, please note that these times can be subject to change as regions shift to and from daylight savings.
Alternatively, if you wanted to speculate on the price movements of utility shares without owning the underlying stock outright, you would need to open a share trading account with a share trading service. This enables you to go long and speculate on the price of a utility stock rising, as well as short and speculate on the price falling. Financial derivatives such as CFDs and spread bets make this possible.
However, if you are trading on a share’s price, you won’t receive any dividend payments from the company as you would if you bought the stocks outright.
Utility stocks: what you need to know before investing
The most important thing to know before you invest in utility shares is that they tend to perform better than other stocks in times of economic uncertainty. As a result, many market participants will have utility shares in their portfolios, either as a hedge or as an outright long term buy and hold investment.
Utility shares summed up
- Utility shares are some of the most popular shares that investors use as part of a buy and hold strategy
- They often pay high dividend yields, but dividends are only available to investors who buy the shares outright
- Different utility stocks provide different services, including supply electricity and water to their customers and maintaining their delivery networks
- Utility stocks tend to perform well during times of economic uncertainty, when stocks from other sectors might be expected to underperform or decline in value
- Aside from investing in utility stocks outright, you can also use financial derivatives to speculate on their price rising or falling during times of economic slowdown or recovery
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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