Investing in utilities gives investors an added incentive to pay attention to the water they get from the faucet every day, the gas or electric that heats up their meals, and the heat and the AC that keeps them comfortable 24/7. The utility sector allows investors to diversify and look for growth, from funds that include American Water Works and ConEdison to NextEra Energy and tomorrow’s next-gen renewable startup.

Utilities—electricity, natural gas, renewable energy, and water and waste services—form the smallest sector of the market, representing just 2.5 percent of the S&P 500 (1). Yet indices holding funds from this sector tend to operate in the black, even outpacing the S&P 500 (2). The utilities market holds a wealth of opportunities—relative stability, high dividends, and innovation—to pursue value or growth investing strategies.

Utilities typically hold monopolies in the geographic regions that they serve. Add up the cost of building and maintaining a power plant, a grid network required for distribution of electricity, etc., and the customer service infrastructure to collect payments and meet the needs of mass users, and it rapidly gets too expensive except for the bigger players. For example, American Water Works is the largest publicly traded water and wastewater utility in the U.S. (3). It services millions of customers in multiple states—a reliable customer base. This base plus the stability of little to no competition results in a company that can weather an economic downturn better than others.

A lower investment risk doesn’t mean that there is no risk. A utility company cannot easily make rate increases to adjust for a profit margin, because governments monitor utility rates for customers, regional growth rates, and service reliability.

Especially now, as climate change sparks natural disasters that rip apart infrastructure, companies must repair substantial damage, on top of the usual expensive capital improvements. These are usually debt-financed expenditures, and so utilities tend to carry a lot of debt. This makes them vulnerable to rising interest rates: higher interest rates both typically lower stock prices and increase debt for utility companies.

Add to those challenges supply chains, global conflicts, and tariffs—and it seems that the past few years would have completely dimmed the performance of utilities.

Yet utility stocks continue to rally and even seem ready to begin a new era of growth. The future looks refreshingly green, thanks to renewable energy sources like wind and solar. To reach zero-emission goals, governments are injecting funds into forward-thinking initiatives, such as the $1 trillion “Build Back Better” bill in 2021 that jump started infrastructure for renewables and clean energy technologies—with $65 billion (4). In 2022, the U.S. Inflation Reduction Act, or IRA, further extended the long-term growth of the renewable energy market sector, influencing capital investment decisions for years to come, with a predicted additional 230 GW wind and solar capacity over what had been planned before the IRA (5).

Thanks to these infusions of capital, companies in the utility sector are predicting earnings growth from 5 to 8 percent and even 10 percent (6). Ultimately, what’s important for many investors interested in utilities is that what is healthy for the planet can turn a profit.

Especially during market downturns, investors often choose utilities to diversify their portfolio, not to make a quick buck. Considered a defensive investment, utilities can be a great tool to reduce overall risk. Utilities are generally regarded as a safe investment, more correlated with bonds than stocks.

Because utilities participate in a regulated industry, competition is generally stable and limited. Because they are regulated entities, they have very predictable cash flow and profits. This all allows utilities to pay consistent dividends, generating steady income for investors. They also pay relatively high dividends to shareholders in part because they have little need to reinvest earnings into operations. Usually, changes in the economy don’t affect the performance of utilities in the market. After all, even in a recession we need water from our sinks and energy to power our refrigerators.

Sustainability in the utilities sector isn’t limited to wind and solar opportunities, although there are plenty of industry giants as well as startups to find who are exploring and developing wind and solar energy. Investors interested in environmental, social and governance (ESG) can financially support companies aligned with sustainable values too; these ratings continue to drive transparency in companies’ public disclosure findings, with diverse stakeholders shifting C-Suite priorities. After a rough couple of years, batteries with more storage are finally able to power up more electric vehicle (EV) sales. “Clean” hydrogen is inching closer to mainstream, and will need dedicated infrastructure. Advanced digital technologies are connecting productivity and safety in ever-more efficient ways.

Stable yet primed for growth, utilities could be the perfect match for investors looking to explore next-gen technologies or renewables, or just wanting to know that their investment helps provide essential services around the world.

There are a number of ways to invest in utilities. If you are interested in adding utilities to your portfolio because you are interested in dividends, try a search like “invest in utilities with high dividends.” If you’d like to diversify your investment, you can always search for “utilities ETFs and mutual funds.” Here are a few searches to get you started (7,8):

Duré, Elana, “What to consider when investing in utilities,” March 22, 2022, J.P. Morgan Wealth Management, https://www.chase.com/personal/investments/learning-and-insights/article/what-to-consider-when-investing-in-utilities.

Bary, Andrew, “Utility Stocks Have Been Big Winners This Year. Why It’s Time to Lighten Up,” September 21, 2022, https://www.barrons.com/articles/utility-stocks-outperform-expensive-51663708594.

DiLalo, Matthew, “Investing in top Utility Stocks, July 27, 2022, The Motly Fool, https://www.fool.com/investing/stock-market/market-sectors/utilities/.

“How energy and utilities can access infrastructure spending for clean energy and modernization efforts,” accessed December 7, 2022, pwc, https://www.pwc.com/us/en/services/consulting/cybersecurity-risk-regulatory/library/infrastructure-investment-jobs-act/modernizing/energy-utilities-infrastructure-bill.html.

"The Big Picture: 2023 Electric, Natural Gas and Waters Utility Outlook, October 2022," S&P Global market Intelligence, https://pages.marketintelligence.spglobal.com/rs/565-BDO-100/images/2023-us-electric-natural-gas-water-utilities-outlook-big-picture-report.pdf.

"The Big Picture: 2023 Electric, Natural Gas and Waters Utility Outlook."

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Get instant access to market data, trends, investing guidance, and on-demand analysis with Magnifi Personal.

Utilities Stocks

Utility investments offer a unique way to diversify a portfolioproviding stability and returns almost as predictable as your monthly bill.

Table of contents

Invest with Intelligence

How to Invest in Geothermal Energy

Geothermal energy is gaining market share as the world reduces dependence on carbon energy sources.

Invest in Nuclear Energy

As the world transitions away from carbon, nuclear energy has emerged as a compelling complement to sustainable, but less reliable, sources of energy like wind and solar.

Investing in Solar

In the US, a new solar project is installed every 60 seconds. Heres how solar energy became a serious contender in the energy sectorand how you can invest in a sustainable future.