Utility Stocks: A Solid Income Choice with AI Potential
The public utilities sector, often perceived as a haven for growth stocks, has historically drawn investors seeking a blend of solid dividends and stability. While utility stocks may not scream excitement, they are more than just a safe choice.
Looking at the Vanguard Utility ETF (NYSEMKT: VPU), it’s evident that this sector can deliver impressive returns. In the previous year, power utilities soared by 16.5%, positioning them as the fourth-largest global sector. Interestingly, this performance closely mirrored that of financial institutions, with the Vanguard S&P 500 ETF (NYSEMKT: VOO) rising by 17.8% in 2025.
Such strong performance is a plus, particularly when you consider the substantial dividend yield common in the utility sector. The Vanguard ETF has an SEC 30-day yield of 2.73%, significantly higher than that of the S&P 500 index. This makes it a noteworthy income option, but there’s more—this ETF stands out among income investments.
Historically, the utilities sector has been seen as a dependable income generator. However, the recent AI boom is reshaping its growth narrative. While you won’t find any of the “Magnificent Seven” stocks in the Vanguard Sector ETF, several companies are likely to benefit from the increasing demand for power driven by AI advancements. Every year, we invest significantly in building energy-intensive data centers, which is critical for those eyeing this utility ETF. According to Goldman Sachs, U.S. electricity consumption is predicted to grow at a 2.5% annual rate from 2023 to 2030, heavily fueled by data centers.
Some holdings in the ETF are already tapping into these AI benefits. For instance, Constellation Energy, the second-largest component, has recently signed a 20-year power purchase agreement with Meta Platforms last June. Similarly, more agreements are on the horizon, like with Microsoft in September 2024.
Also noteworthy is Talen Energy, a smaller player in the ETF’s lineup, which has its own 20-year agreement powering an Amazon Web Services (AWS) data center in Pennsylvania.
Don’t overlook NextEra Energy, which is not just the largest utility in the Vanguard ETF but also makes up 11.5% of its holdings. This came shortly after it announced a significant expansion of its long-term collaboration with Alphabet‘s Google Cloud unit.
Now, while the excitement surrounding AI can overshadow this sector, it’s important to note that dividend yields have dipped as stock prices have surged. This might make the income aspects seem less appealing, but the potential payouts are still attractive. Among its 68 unique holdings, some, like American State Water, stand out, having successfully increased dividends for 71 consecutive years.
Moreover, the $8.8 billion Vanguard ETF might extend benefits beyond just AI, particularly if the Federal Reserve continues to lower interest rates, which could further enhance the capital-intensive utility sector.
All this comes with a relatively low annual fee of 0.09%, translating to just $9 on a $10,000 investment.
Before diving into Vanguard Utilities ETF shares, prospective investors should keep a few points in mind. While some may advocate for newer stocks, this ETF remains a wise, if not exciting, choice for income-oriented investors.
