Utilities' AI Growth Story is Real
Recent windfall gains may not be.
Editor’s note: This issue of Dividends Roundtable includes actionable investment advice for Dividends Premium readers. Members are also welcome to join my Dividends Roundtable live chat on Substack. To your wealth and an early Spring!—RC
Slow and steady wins the race in investing, as in life. And no stock sector has done that better for investors than utilities—the companies that bring us electricity, natural gas, water and communications service.
On September 4, 1882, Thomas Edison threw the first switch on America’s first power plant in New York City. And in the nearly 144 years since, not one regulated utility has ever gone out of business.
There have been plenty of stumbles. In the early 2000s, a dozen companies including CMS Energy (NYSE: CMS) came within a false step of Chapter 11 bankruptcy, as they reaped the whirlwind from copying Enron’s unsustainable business model in the 1990s.
Large powerful utilities like Southern Company (NYSE: SO) were dragged down by the unexpected costs of building large nuclear and coal power plants in the 1970s. And in the 1980s, survivors of the building boom like NextEra Energy’s (NYSE: NEE) predecessor company FPL Group made disastrous investments in businesses management knew nothing about, including banks, insurance companies and drug stores.
General Public Utilities skidded under $1 on the news of the Three Mile Island nuclear incident. And in the past decade, wildfire damages forced California’s PG&E Corp (NYSE: PCG) into bankruptcy and nearly pushed Hawaiian Electric (NYSE: HE) there as well.
But every time utilities seemed about to come undone, they bounced back. And investors willing to bet their recovery have reaped windfall gains just for buying and holding.
No other sector can match that track record of coming back from any disaster. And utilities are also the only industry that can say there’s never been an unsuccessful merger. That is, none of the literally thousands of unions since Edison’s day has failed to create a financially stronger, scaled up and more resilient company.
Tortoises or Hares?
Utilities are the ultimate tortoise stocks. Year after year, companies expand earnings by investing in the “rate base” of their systems. No one is posting 73 percent revenue expansion and 98 percent earnings growth, as artificial intelligence leader NVIDIA (NSDQ: NVDA) did in Q4. But by growing rate base 6,7 even 9 percent a year, best in class sector companies are reliably growing their earnings a like amount. And that’s the fuel for matching higher dividends and share price appreciation in the long haul.
To a utility, the long-term is a tortoise-appropriate 5 to 10 years. But lately, many sector stocks have been impersonating hares.
It’s no real surprise that electricity industry leader NextEra Energy is out to a nearly 15 percent total return this year, while the S&P 500 is so far underwater. The Florida utility and leading producer of power from wind, solar, natural gas and nuclear energy posted a tortoise-like 15 percent return in 2025. But long-time laggards like Verizon Communications (NYSE: VZ) are up nearly 30 percent in 2026 after lagging the market for years.
What’s pushing these gains? In large part it’s the fact investors are looking for bets on artificial intelligence that aren’t the Big 7 Tech stocks, which still make up 35.5 percent of S&P 500 ETFs despite recent weakness.
The Utilities SPDR ETF (XLU) is sitting on a 9.5 percent year-to-date return, nearly 11 percentage points better than the S&P. And my hand-picked Aggressive, Conservative and Dividend Reinvestment portfolios are up 11.8, 12.9 and 15.7 percent, respectively.
So what am I complaining about? In a nutshell, I love the reality of artificial intelligence. But I hate the hype.
Or to put this another way, natural gas, water, communications and especially electricity companies can look forward to robust growth for years to come, as AI applications grow and consume more services. But long before that materializes—and possibly in the very near future—a “rationalization” of AI hype may have this tortoise sector back hiding under its shell.
Don’t get me wrong. I’m not forecasting AI’s draw on utility services will prove to be a bust. To be sure, there’s always overbuilding in every boom. And not every data center owner signing a contract now would have staying power if eventual demand is less than hype would suggest.
But utilities right now are protected from an AI earnings bust. Management and the state regulators who oversee the real business of utilities are inherently conservative. And they’re even more so now with inflation rising and affordability a major issue in ongoing campaigns for the US Congress, as well as state legislatures and governors’ mansions.
Utilities are only building when data center owners are willing to sign contracts of at least 10 to 15 years with minimum purchase commitments, as well as to pay development costs. And even if some of these data centers “go dark,” the generating capacity and related transmission they’re building now could be repurposed for other customers.
What does worry me is what a cooling of AI hype could do to utility stock prices in the next 12 to 18 months--especially in an environment where the economy is slowing, inflation is rising and borrowing costs are still higher for longer. The fact utility stocks are still relatively underowned in the S&P 500 at around 2 percent is of some comfort. And so is the fact that they’re locking in all the business they can handle.
But we’re already seeing many companies slow or even suspend dividend increases as well as stock buybacks—so they can hold in more cash with capital markets uncertain. And with so many companies now yielding less than 3 percent, there’s not a lot to hold them up.
What We Can Do
So what can we do now to let our profits run in this tortoise-like sector that continues to behave like a hare, without putting recent gains at risk? Here’s what I’ve learned from 40 plus years investing in and advising others in this unique group of stocks:
