- 1Utilities provide the highest yields and lowest volatility in equities
- 2Regulated utilities earn a guaranteed return on invested capital
- 3Grid modernization and data center demand are creating growth opportunities
- 4Our stability factor naturally identifies the best utility investments
#Why Utilities Are Unique
Utilities are the only sector with a regulated return model. State regulators set the rates utilities can charge and the return they can earn on capital invested in infrastructure. This creates:
- Predictable earnings — Revenue is essentially guaranteed
- Stable dividends — 3-5% yields with decades of growth history
- Capital allocation clarity — Invest in infrastructure, earn regulated return
- Inflation pass-through — Rate cases allow cost recovery
Sub-Sectors
| Sub-Sector | Yield Range | Growth Driver | Examples |
|---|---|---|---|
| Regulated Electric | 3-4% | Rate base growth, grid modernization | Duke Energy, Southern Company |
| Regulated Gas | 3-5% | Distribution system investment | Atmos Energy |
| Independent Power | 2-4% | Renewable builds, merchant prices | AES, Vistra |
| Water Utilities | 1.5-3% | Infrastructure replacement mandates | American Water Works |
| Renewable Utilities | 2-3% | Clean energy transition | NextEra Energy |
#The Rate Base Growth Model
Understanding utility investing requires understanding rate base growth:
- 1Utility invests in grid infrastructure (transformers, lines, substations)
- 2Regulator approves the investment and allowed return on equity (typically 9-11%)
- 3Utility earns that return through customer rates
- 4Earnings grow as the rate base (total invested capital) increases
This is why capex plans matter more than revenue growth for utilities. More investment = larger rate base = higher earnings.
#Key Metrics
| Metric | What It Measures | Target |
|---|---|---|
| Dividend Yield | Current income | 3-5% |
| Payout Ratio | Dividend sustainability | 60-75% |
| Rate Base Growth | Future earnings growth | 6-8% annually |
| Allowed ROE | Regulatory generosity | > 9.5% |
| FFO/Debt | Balance sheet safety | > 14% |
#How Our Model Applies
Stability (where utilities shine)
Utilities consistently score in the top decile for stability. Low beta, predictable earnings, and minimal surprise risk make them the quintessential low-volatility investments.
Value
Utilities oscillate between overvalued (when rates are low and investors chase yield) and undervalued (when rates rise and bonds compete). Our value factor identifies the best entry points.
Profitability
Regulated returns mean profitability is stable but rarely exceptional. The best utility stocks maintain their allowed returns consistently and earn above their cost of capital.
#Grid Modernization: The Growth Catalyst
The utilities sector is experiencing its biggest capex cycle in decades:
- Data center power demand — AI infrastructure requires massive electricity
- EV charging infrastructure — Electrification of transportation
- Grid hardening — Climate resilience improvements
- Renewable integration — Solar, wind, and battery storage
This capex translates directly into rate base growth and earnings growth — a rare combination of safety and growth.
#The Bottom Line
Utilities are the ultimate defensive allocation. They protect capital in downturns, provide growing income, and now offer genuine growth through grid modernization. Our model's stability and value factors are particularly effective for identifying the best utility investments.
Last updated: February 10, 2026