The media is hyping utility stocks as a smart way to invest in the growth of AI. Headlines like “The Unlikely Stocks That Became a Hot Bet on AI” from The Wall Street Journal and “Utility Stocks Could Be Headed for a Decade of Strong Growth, Driven by Data, AI” from Barron’s are popping up everywhere.
Contrarians, however, always look for value first. When it comes to utility stocks, we pay attention to interest rates. Utility stocks tend to rise as rates fall, making them a good investment during a “rate panic.”
With the Federal Reserve likely to start cutting rates again, utility stocks are still a good buy. However, we need to be cautious, avoiding overvalued options like the Utilities Select SPDR ETF (XLU) with a current yield of 3.1%.
Instead, lesser-known plays like the Reaves Utility Income Fund (UTG) are worth considering. UTG pays a generous 8.2% yield and has shown strong performance over the past year.
The growth of AI is driving up power demand, leading to a need for significant investments in the power grid. Government investment in infrastructure projects is high, which will benefit utilities.
Additionally, the rise of electric vehicles (EVs) will further increase power demand. Dominion Energy (D) is a good stock to consider, with a rich 5.3% dividend yield and a strong customer base in key areas for data centers.
Despite a dividend cut in 2020, Dominion Energy has been reducing its debt and is well-positioned to benefit from lower interest rates. As power demand increases, the company is set to see growth in its operations.
In conclusion, the electrification of everything will boost utilities, making them a good investment opportunity. UTG and Dominion Energy are solid options for investors looking to capitalize on this trend.