Fresh inflation data was released on Tuesday, and it showed that the rate of inflation was higher than expected in January. Analysts projected YoY inflation at 6.2% and Core inflation at 5.5%, but figures came in hot at 6.4% and 5.6% respectively.

The CPI component with the second highest YoY inflation was Utilities, at a whopping 26.7%. While high inflation is unequivocally bad for consumers, in this instance it is quite good for the utilities stocks.

Utilities are also currently the #1 sector in the Zacks Sector Ranks. Utilities typically provide a low risk, steady return for portfolios, and offer generous dividend yields to boot. If 2023 is anything like last year, it may be another good year for defensive stocks like utilities.

The York Water Company

The York Water Company (YORW Quick QuoteYORW - Free Report)  is a 200-year-old water collection and distribution utility. YORW owns a number of wastewater collection and treatment facilities, two reservoirs containing an estimated 2.2 billion gallons of water, a 15-mile pipeline from the Susquehanna River and nine groundwater wells. It serves a number of industries across three counties in south-central Pennsylvania, and although very old, is not very large, with a market cap of $635 million.

York Water Company currently sports a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. The current quarter sales estimates are expected to grow 2% to $14 million, while current year sales are projected to grow 7% to $59 million. Next year’s sales are expected to climb 17% to $69 million, which is quite impressive growth for a utility company.

YORW also has a strong track record of raising its dividend payment. The current dividend yield is 1.8%, and has been raised by 4% over the past 1, 3, and 5 years. Considering a big part of the security offered by utilities is the dividend, it makes YORW very appealing.

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YORW has had very comparable returns to the S&P 500 over the past ten years, and over the last year has significantly outperformed the index.

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At 29x one-year forward P/E, the stock is not cheap, but sometimes you have to pay up for security. Pennsylvania certainly isn’t going to stop consuming water any time soon. With such security, YORW has maintained an elevated valuation for a long time now, and even at 29x is below its ten-year median of 32x.

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MGE Energy

MGE Energy (MGEE Quick QuoteMGEE - Free Report) , is a public utility holding company involved in electric, gas, and energy operations.  MGEE is based in Wisconsin and provides electricity to 159,000 households in Dane county, and distributes natural gas to 169,000 customers in seven Wisconsin counties. The company generates, purchases and distributes from coal-fired, gas-fired, and renewable energy sources as well as purchases power under short and long-term commitments.

MGE Energy currently holds a Zacks Rank #1 (Strong Buy), meaning analysts are revising earnings expectations higher. MGEE reports earnings on February 22, and has high expectations for the quarter. EPS for the quarter are expected to grow 83% to $0.66 per share, while sales are expected to grow 5.7% to $171 million over the same period.

MGEE is another consistent dividend raiser. At the current yield of 2.3%, dividends have been raised 5% on average over the last 1, 3, and 5 years. Its 5% annualized adds up and since 2012, with investor dividend distribution up 50%.

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MGE energy is trading at a reasonable valuation as well. At 20x one-year forward P/E, the stock is well off the high valuation of 30x, and below the 10-year median of 23x.

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Allete

Allete (ALE Quick QuoteALE - Free Report)  is an extremely compelling investment at the moment. ALE is a diversified electric, energy, and water utility providing electricity for 15,000 customers, natural gas for 13,000 homes, water for 10,000 homes, and regulated utility electric services for 145,000 retail customers in northeastern Minnesota.

ALE generates electricity from coal-fired, biomass, natural gas, hydroelectric, wind, and solar. It also focuses on developing, acquiring, and operating clean and renewable energy projects, and owns a 1,000 megawatt wind farm.

Allete is an extremely interesting investment because of its very diversified assets, which are highlighted by their growing alternative energy plants, and reasonable valuation. ALE is currently trading at 14.5x one-year forward P/E, nearing its ten-year low valuation of 13x, and well below its median of 18x. For this you get a standard utility business and company that is well positioned for evolving energy landscape.

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This forward-looking utility business is also accented by a hefty 4.6% dividend, which has grown by an average of 3.5% annually for the last five years. Over the past 15 years the dividend has steadily increased from $1.72 per share to $2.58 per share, a CAGR of 2.8%.

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Bottom Line

Any well diversified investment portfolio deserves to have the balance of Utility stocks. While they may not offer the appreciation of a growth stock, your patience is rewarded with steady returns and a growing dividend payment.

Furthermore, with high growth technology companies, you never know when AI or some other cutting-edge tech is going to disrupt the business model. As is seen in YORW, these utilities companies have incredible staying power.

While growth stock have been on a tear to start the year, that trend may very well not continue, and if it doesn’t, you can bet investors will pile back into defensive stocks like utilities.