5 Safe Haven Utilities to Power Up Your Portfolio

It's said a rising tide lifts all boats, which may help explain why the typically staid utility sector is trading at historically high valuation levels. Nevertheless, this remains a relatively defensive sector and investors and MoneyShow.com contributors continue to place a premium on the safe haven status of utilities. Here are five favorites in the group.

Chuck Carlson, DRIP Investor

Southern Company (SO) recently moved to a new 52-week high. Despite the strength in these shares, the stock still throws off a dividend yield of 3.6%, roughly double the yield on the S&P 500 Index.

I don't expect these shares to continue to crush the broader market, but I do expect them to provide a nice total return for growth-and-income investors. The stock ranks as a top buy in the utility sector.

Southern Company operates seven regulated utilities serving nine million customers in six states -- Alabama, Illinois, Georgia, Virginia, Tennessee, and Mississippi. Electricity is generated via natural gas (50%), coal (22%), nuclear (16%), and renewables/other (12%).

The company also has businesses in the mobile-communications and fiber-optics markets. Wall Street seems to be growing more comfortable with the company's two nuclear projects at its Georgia Power subsidiary.

The firm said in the third quarter that it was not adding to its costs of the projects and remains focused on meeting their regulatory approved in-service dates of November 2021 and November 2022. That news, coupled with a strong earnings beat in the quarter, has provided a nice tailwind for the stock.

The company posted per-share profits of $1.34, well above the consensus estimate of $1.14. Warmer-than-normal weather during the quarter at its regulated utility operations boosted profits.

One factor that should help the company's long-term growth potential is the growth prospects for its service region. Through September, the firm added over 30,000 new residential electric customers and over 21,000 residential natural gas customers across the regulated utilities.

Customer growth continues to be driven primarily by strong job and population growth in its Southeast service territory. Dividend growth has been impressive. The company has boosted its dividend annually for 18 consecutive years, and I expect a dividend hike sometime in the first half of 2020.

It is possible that utility stocks, including Southern, will take a breather in the near term. However, investors should use price dips to acquire these shares. The combination of decent price appreciation and a dividend yield of 3.6% should afford suitable long-term returns for more risk-averse investors.

Richard Moroney, Dow Theory Forecasts

Utility stocks started the year with high valuations relative to both the market and their own historical norms. Not to mention their poor fundamentals and slow operating growth.

Yet so far this year, the S&P 1500 Utility Sector Index has gained 5.5%, second-best among the 11 sectors of the broad S&P 1500. We are adding two new stocks to our Top 15 Utilities portfolio.

Over the last year, sales and operating cash flow at NiSource (NI) have trended higher. The consensus projects sales growth of 4% and per share-profit growth of 6% for the full years 2020 and 2021.

NiSource's aggressive capital-spending program should broaden its rate base in coming years, and the company operates in markets with a history of approving rate increases. NiSource serves 4 million natural gas or electricity customers in seven states.

OGE Energy (OGE) , which provides electricity and gas to about 830,000 customers in Oklahoma and Arkansas and owns part of a pipeline operator, pays a yield of 3.4%, well above the sector average of 2.6%.

At 20 times trailing earnings, OGE shares trade at a 16% discount to the typical electric utility. While OGE Energy's utility isn't likely to deliver eye-popping growth, the stake in Enable Midstream Partners (ENBL) provides generous cash flow and the potential for OGE to exceed the market's modest expectations.

Tom Hutchinson, Cabot Dividend Investor

Utilities typically have more defensive businesses that tend to hold up well in a bad economy. They are among the best sectors to be in when the market turns south. Sure, the market has been great lately. But investors realize that bull markets and recoveries always end, and this is now the oldest bull market and recovery in history.

The one drawback is that after performing so well for so long, the sector is somewhat expensive. But it still has great momentum, and the reasons that attract investors are unlikely to change anytime soon. There is still more room to run.

One stock of note, NextEra Energy (NEE) , is the county's largest utility by market cap. It's really two utilities in one, combining a traditional regulated utility business with a vast alternative energy business. It provides both reliable cash flow and more earnings growth that a typical utility.

But that description doesn't really do it justice. It combines perhaps the best-regulated utility business in the country with the world's largest alternative energy producer. Its Florida Power & Light business is the country's largest regulated utility, operating in an extremely regulatory friendly environment that also has a growing population.

The NextEra Energy Resources subsidiary is a world leader in nuclear, wind and solar energy. It combines two of the very best businesses of its kind in the world. It's like a utility stock on steroids, providing stable income with a solid level of earnings growth and a rising dividend and the market loves it.

The stock has significantly outperformed both its utility peers and the overall market in every measurable period over the past 15 years, providing an average annual return of about 20% over the last 10. The company has also targeted annual dividend hikes of 12% to 15% over the next several years. Most importantly, NEE performs while the market is booming and when the market struggles.

Roger Conrad, Conrad's Utility Investor

In February 2018, I first recommended Edison International (EIX) as a new Aggressive Holding; the shares had taken just a big hit on concern the company would be held liable for billions in 2017 wildfire damages under the state's "inverse condemnation" law.

My view was investors were underestimating management's ability to navigate California regulation. And I saw them undervaluing the company's robust rate base growth, from upgrading its power grid to meet the state's aggressive de-carbonization goals.

California regulators recently granted Edison a solid 10.3% return on equity in its multi-year rate case. That assures a solid return on the $25 million management expects to invest for 7.7% annual rate base growth through the end of 2023.

The company has also amicably settled its liability from 2017 and 2018 wildfires. A successful debt refinancing has returned its cost of debt capital to one of the lowest in the power sector. And the company has more than tripled its dividend growth rate for 2020 to 4.1%.

Even after a solid performance in 2019, Edison recently traded at a discounted valuation of 16.6 times expected 2020 earnings. We expect the gap with the Dow Jones Utility Average's 20.7x multiple to close by mid-year, providing a lift to the shares. Meanwhile, reduced legal risk and stronger finances earn the company a Quality Grade boost to A and a move to our Conservative Holdings. Buy up to $75.