This high-flying sector is up 10% in the third quarter. How to play it

Utilities – a staple of retirees’ portfolios for their steady dividends – are emerging as a hot corner of the market in 2024, and UBS is highlighting the group as a “most preferred” sector in August. Publicly-traded utility stocks have surged nearly 19% in 2024, behind only information technology and communications services as investors look to utilities as another way to play the artificial intelligence trend. What’s more, their dividend yields will grow more attractive if Treasury yields fall, and their borrowing costs will grow less burdensome if the Fed cuts interest rates, as is widely expected. .GSPU YTD mountain The S & P 500 Utilities Sector in 2024 In the third quarter, utilities have stood out, climbing 10%, through Friday. That compares to a 0.5% advance from tech and a decline of more than 2% for communications services. Electricity demand is expected to grow as much as 20% by 2030, with AI data centers adding an estimated 323 terawatt hours of power demand by then, according to an April analysis from Wells Fargo. To play the trend, UBS strategist James Dobson called out NextEra Energy as a “top pick” among utilities, according to a report last week from the bank’s Chief Investment Office, Global Wealth Management. Shares of NextEra, parent of Florida Power & Light and NextEra Energy Resources, are up 31% in 2024 and yield 2.6%. “With distinct competitive advantages in renewable development in the U.S. and an attractive valuation, we believe NEE can outperform the sector over the next 12 months,” Dobson wrote. He noted that the company is “exceedingly well positioned” to benefit from rising demand for power related to AI data centers, reshoring and electrification. Indeed, NextEra Energy Resources, which operates wind and solar projects, added more than 3,000 megawatts of new renewable power and storage projects to its backlog in the second quarter, including agreements with Google to provide 860 megawatts to data centers, NextEra CEO John Ketchum said on a July 24 earnings call. UBS isn’t alone in recommending NextEra Energy. Sixteen of the 23 analysts covering the stock rate it a buy or strong buy, according to LSEG, but consensus price targets see only about 3% upside from current levels. Dobson and his team dropped Vistra , which provides power in Texas, from the firm’s “top picks” list, although it continues to be labeled “most preferred.” Shares of Vistra have rocketed nearly 123% in 2024, but they’re about flat in the third quarter. The company offers a modest dividend yield of 1%. “As an independent power producer, VST has fewer defensive attributes relative to other regulated utilities in the sector,” UBS noted in its report. Independent power producers aren’t public utilities, so they are less regulated. Rather, they generate power to sell to other customers, including other utilities and end users. Nevertheless, the stock is highly favored on Wall Street, with roughly 92% of the analysts covering Vistra rating it a buy or strong buy, according to LSEG. Analyst consensus price targets are calling for nearly 29% upside from current prices.