3 No-Brainer High-Yield Utility Stocks to Buy With $500 Right Now

Key Points

• Utilities provide what amounts to a basic necessity of modern life.

• Electricity demand is set to dramatically increase in the decades ahead.

• Investors have multiple attractive options for how they want to invest in the sector.

• 10 stocks we like better than Vanguard Utilities ETF ›

If you have ever lived through a blackout, you know just how important power is to modern life. The interesting thing is that electricity is going to become even more important in the years ahead, with U.S. electricity set to rise from 21% of end energy use to 32% between 2020 and 2050.

That means there is a multi-decade opportunity in electricity, and here are three ways to play it.

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1. Go all in on the idea, without picking a single stock

The first choice here isn't a stock, it's an exchange traded fund (ETF) called the Vanguard Utilities ETF (NYSEMKT: VPU). Without getting too deep into the details, this ETF is designed to provide broad exposure to the sector. Roughly 60% of its assets are tied directly to electric utilities. Another 30% is in multi-utilities and independent power producers.

Electricity is the core of this ETF, which offers an attractive 2.7% yield. That's not massive, but it is more than twice the yield you would get from the S&P 500 index. This is basically a way to invest in the electricity opportunity without having to pick a winner. This could be very helpful for someone who isn't a fairly active investor.

Notably, demand from electric vehicles is expected to grow 9,000% between 2020 and 2050, but that growth is likely to be highest in the Northeast and Western regions of the country. Meanwhile, electricity demand from data centers is set to rise 300% over the next decade or so, but is likely to be most notable in the Mid-Atlantic and Texas.

There are a lot of moving parts to investing in this sector, and the Vanguard Utilities ETF is a simple way to make sure you ride the broader demand trend without having to figure out what specific stock to buy and when. A $500 investment will buy roughly two shares of this diversified utility ETF.

Image source: Getty Images.

2. NextEra Energy is a dividend growth machine

If you like to pick dividend stocks, however, the best dividend growth choice is likely to be NextEra Energy (NYSE: NEE). This company is really two businesses in one.

The core is the company's regulated utility operation, which is largely made up of Florida Power & Light. It is one of the largest electric utilities in the country and has long benefited from the in-migration that the Sunshine State has seen.

On top of this business, NextEra Energy has built one of the world's largest providers of solar and wind power. This is the growth engine, tapping into the shift taking place in the world from dirtier energy sources to cleaner ones.

The end result of this mix is nothing short of impressive. The dividend yield is attractive at roughly 3.1%. But the payout growth is huge, with an average annualized pace of 10% over the past decade. A 10% dividend growth rate is good for any company, but it is shockingly high for a utility.

And management believes it can keep up that pace over the near term, with 6% to 8% increases in adjusted earnings per share projected through at least 2027 and 10% dividend growth through at least 2026. A $500 investment will net you about six shares of NextEra Energy.

3. Black Hills is a Dividend King with a lofty yield

For investors who prefer something a bit more boring, Black Hills (NYSE: BKH) will probably be attractive. This company operates regulated natural gas and electric utilities across parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming.

The big goal is to just be a reliable provider of energy to its roughly 1.35 million customers. However, given the increase in demand expected over the next couple of decades, that should be more than enough to keep Black Hills' dividend rising.

Dividend growth is, in fact, what sets Black Hills apart from the pack. It is one of a small number of utilities that has achieved Dividend King status. Its streak is up to 55 years, with annualized dividend growth of around 5% over the past decade. Slow and steady is what you get here, along with a lofty 4.5% or so dividend yield.

If you are focused on maximizing your income and don't want to take risks, Black Hills will likely fit perfectly into your portfolio. A $500 investment will allow you to buy around eight shares of Black Hills.

Three ways to play a multi-decade trend in power

The most important thing for dividend investors to keep in mind as they look at these three no-brainer high-yield utility investments is that the opportunity is not short term. If you buy in here, you'll need to be thinking in decades and not days. The utility sector moves slowly and deliberately because power is so important to modern life. And that means this is a huge opportunity, but one that will take time to materialize.

If you have what it takes to buy and hold (and hold, and hold), you'll want to look at the Vanguard Utilities ETF, NextEra Energy, and Black Hills as electricity demand is set for a drastic long-term increase.

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Reuben Gregg Brewer has positions in Black Hills. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.