Utilities — a staple in retirees' portfolios because of their stable dividends — are emerging as a hot market segment in 2024, with UBS highlighting the group as its “most favored” sector in August. Listed utility stocks are up nearly 19% in 2024, trailing only information technology and communications services, as investors view utilities as another way to capitalize on the artificial intelligence trend. In addition, their dividend yields will become more attractive if Treasury yields fall, and their borrowing costs will become less burdensome if the Fed cuts rates, as is widely expected. .GSPU YTD Mountain The S&P 500 Utilities Sector in 2024 Utilities have excelled in the third quarter, rising 10% through Friday. That compares with a 0.5% gain in technology companies and a more than 2% decline in communications services. Electricity demand is expected to rise as much as 20% by 2030, with AI data centers consuming an estimated 323 terawatt hours of electricity by then, according to an April analysis by Wells Fargo. To capitalize on the trend, UBS strategist James Dobson has named NextEra Energy a “top pick” among utilities, according to a report last week from the bank's chief investment office, Global Wealth Management. Shares of NextEra, the parent company of Florida Power & Light and NextEra Energy Resources, are up 31% through 2024, yielding 2.6%. “With significant competitive advantages in U.S. renewable energy development and an attractive valuation, we believe NEE can outperform the sector over the next 12 months,” Dobson wrote, noting that the company is “extraordinarily well positioned” to capitalize on rising demand for electricity related to AI data centers, reshoring and electrification. In fact, NextEra Energy Resources, which operates wind and solar projects, added more than 3,000 megawatts of new renewable energy and storage projects to its backlog in the second quarter, including agreements with Google to provide 860 megawatts for data centers, NextEra CEO John Ketchum said on a July 24 conference call. UBS isn't the only one recommending NextEra Energy. According to LSEG, 16 of the 23 analysts covering the stock rate it a “buy” or “strong buy,” but consensus price targets see only about 3% upside from current levels. Dobson and his team have removed Vistra, which provides power in Texas, from the company's “top picks” list, although it remains “most preferred.” Vistra's shares are up nearly 123% in 2024, but they're roughly flat in the third quarter. The company offers a modest 1% dividend yield. “As an independent power producer, VST has fewer defensive characteristics compared to other regulated utilities in the sector,” UBS noted in its report. Independent power producers are not public utilities and are therefore less regulated. Rather, they generate electricity to sell to other customers, including other utilities and end users. Nevertheless, the stock is very popular on Wall Street. According to LSEG, around 92% of analysts covering Vistra rate the stock as a buy or strong buy. Analysts' consensus price targets suggest an upside of almost 29% from the current price.
This emerging sector rose 10% in the third quarter. Here's how you can profit
