Electric utility stocks generally are having a tough year, but they offer good value at current prices.
After a challenging third quarter, these stocks have dividend yields of around 3% and prospects of mid- to high-single digit annual earnings growth in the coming years.
The sector shed its stodgy reputation in the past two years as U.S. power demand rose to meet artificial-intelligence compute. Utilities are upgrading their often antiquated generation and distribution infrastructure and building new power plants.
Electric utility stocks returned about 15% in 2025 as the stocks turned into plays on the data-center boom, particularly independent power companies like Constellation Energy.
This year has been rougher. Higher interest rates, regulatory concerns and a bipartisan national political pushback against data centers have weighed on many of the stocks.
But whereas AI-dependent chip stocks and CoreWeave, a leveraged play on the data-center buildout, have been crushed in recent trading sessions, utility stocks are hanging in there.
The State Street Utilities Select Sector SPDR, the largest utility exchange-traded fund, has perked up 6% in October after dropping 13% in the third quarter, and now is down 2% this year.
Industry bulls point to lower valuations and annual earnings-growth projections for major utilities in the 6% to 9% range through 2030.
"Price/earnings multiples are about the same as they were when interest rates were this high in the early 2000s. But the market is missing that utilities have twice the growth" than they did then, says Jay Rhame, chief executive officer at Reaves Asset Management, which runs a group of utility funds and ETFs.
If technology stocks that dominate the S&P 500 start to crumble -- and there have been some cracks recently -- defensive industries like utilities could benefit. That trend might have started in October.
Major utilities like NextEra Energy, Duke Energy, Southern Co., and American Electric Power trade for an average of close to 19 times projected 2026 earnings and 18 times 2027 profits.
Investors can play the sector though ETFs like the State Street Utilities Select Sector SPDR and Vanguard Utilities, and closed-end funds such as Reaves Utility Income.
Some analysts say investor concerns about a data-center backlash are overdone, given existing contracts with tech giants like Meta Platforms and Microsoft.
Steve Fleishman, an analyst at Wolfe Research, met with utility executives and said, "There has never been a bigger disconnect between management and their conviction on rising growth" and what investors fear.
Another negative is interest rates. The 10-year Treasury yield is up about a percentage point this year to 5.10%.
That offers a safe and competitive yield relative to utilities. The yield gap of the 10-year Treasury note relative to State Street Utilities Select Sector SPDR has widened about 0.75 percentage point this year to more than two percentage points, one of the widest spreads in the past 20 years, according Mizuho utility analyst Anthony Crowdell. "Utilities remain a bond proxy and that is a problem into year end," he wrote in a client note.
A counterargument is that utilities are retaining more earnings now for growth, making the Treasury/utility dividend ratio less important, says Ryan Levine, the Citigroup analyst.
The political backdrop has gotten worse as politicians of both parties focus on higher electric rates, up 6% annually over the past five years. That could make it harder for regulated utilities to get adequate returns on their investments in new generating facilities, transmission lines, and other infrastructure.
Traditional utilities with the most exposure to data-center growth include Entergy and NiSource. NextEra Energy, American Electric Power, CenterPoint Energy, and Duke Energy are large and offer a more diluted play, while utilities like Consolidated Edison in New York and Eversource in New England have little exposure to the AI boom. The purer AI plays are independent power producers Constellation Energy and Vistra Energy.
Levine likes NextEra Energy, which has a large renewable-energy portfolio and owns Florida Power & Light, one of the country's largest and best-run utility companies. NextEra has a deal to buy Dominion Energy, an underperforming Virginia utility.
NextEra stock, at around $79, trades for about 18 times next year's projected earnings and yields over 3%
Fleishman is partial to Houston-based CenterPoint, which has exposure to the growing Texas economy, and American Electric Power, the big Midwest company operating in nearly a dozen states.
KeyBanc analyst Sophie Karp wrote recently that Entergy and NiSource are two of the best plays on data-center growth. Entergy has one of the industry's highest multiyear earnings growth outlooks, at 10%-plus annually through 2030. That is reflected in a high P/E of 20 times next year's projected earnings.
For those looking for a bargain-basement deal, consider PG&E.
The star-crossed company saw its stock price drop 30% in late August when the state legislature failed to provide California utilities with wildfire legal protection supported by Gov. Gavin Newsom.
Analysts are wary of the stock, which trades for just eight times projected 2026 earnings -- less than half the industry average -- due to the liability risk. "The liability policy needs to be resolved," PG&E CEO Patti Poppe told Barron's recently.
"Getting in at this price is an incredible deal," she added. "It's an automatic correction when the legislation is passed." That, however, is no sure thing.
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