AI Needs Power: Invest in High-Yield Utility Stocks to Ride the Electricity Demand Wave

The energy demand of data centers, including hyper-scale facilities and micro edge deployments, is projected to grow from 1% in 2022 to over 3% by 2030. This surge in demand is driven by the increasing adoption of artificial intelligence (AI) and related technologies, which require vast amounts of electricity to power their complex computations. As AI continues to revolutionize industries, the utilities sector is poised to benefit from this growing demand for electricity.

The International Energy Agency estimates that electricity consumption from data centers, AI, and the cryptocurrency sector could rise from 460 terawatt-hours in 2022 to more than 1,000 terawatt-hours in 2026. This increase puts these sectors on par with the total electricity consumed by Japan, highlighting the substantial demand for electricity that AI and related technologies will create.

This growing demand for electricity is already driving the performance of utility stocks. For instance, the utilities sector has been the best-performing sector in the S&P 500 over the past three months, and so far this year, it is behind only communication services and information technology. Travis Miller, energy and utilities strategist with Morningstar, attributes this outperformance to two main factors: the potential for Federal Reserve interest rate cuts, which make the dividends utilities pay more attractive, and the increasing demand from data centers that power artificial intelligence and cryptocurrency.

Specific utility companies that are well-positioned to capitalize on this trend include:

1. Dominion Energy Inc. (D): Dominion Energy had the most mentions of the phrase "data center" in S&P 500 utilities sector earnings calls this quarter. The company provides power to northern Virginia, the largest data center market in the world, where around 70% of all global internet traffic flows through a Virginia-based data center. Dominion has a 5% dividend yield, which is ahead of utilities' average yield of 3.75%.

2. Southern Co. (SO): This Georgia-based company owns electric utilities in three states and natural gas distribution utilities in four. It provides wholesale energy, distributed energy solutions, fiber optics, and wireless communications across the United States. Southern Co. has a dividend yield of 3.6% and has raised its payout for 24 consecutive years. The company believes retail electric sale growth will be in the mid-single range through 2028, helped by the strong economic activity in their geographies, including the growth of data centers.

3. Entergy Corp. (ETR): This Louisiana-based company is one of Miller's top picks. It has 3 million customers in Arkansas, Louisiana, Mississippi, and Texas. The South is a good region for utilities investors to consider due to its growth potential. In addition to demand from data centers and industrial customers, the company will have the opportunity to build infrastructure, which utilities earn money on when they build new infrastructure and then recover the costs from ratepayers with an additional rate of return on the investment.

4. Black Hills (NYSE: BKH): Black Hills is a small but reliable player in the utility sector with a market cap of roughly $4.1 billion. It serves about 1.3 million electric and natural gas customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. The company has benefited from its customer base growing at a rate that's nearly three times faster than overall U.S. population growth. Black Hills has a 4.4% dividend yield, which is notably above the 2.7% utility average, and has increased its dividend for 54 consecutive years.

5. NextEra Energy (NYSE: NEE): NextEra Energy is known for its fast-growing dividend, with an 11% annualized dividend growth over the past decade. The company has a solid foundation in the regulated utility space with Florida Power & Light and has built one of the largest solar and wind companies on the planet. Clean energy still has a huge runway for growth ahead, so there's no reason to think NextEra Energy's dividend growth story is about to stall out.



These companies are well-positioned to benefit from the increasing demand for electricity driven by AI and related technologies, making them attractive investments for those looking to capitalize on this trend. However, it is important to note that the growth of AI-related electricity demand is influenced by several key regulatory and technological developments. These factors can either accelerate or hinder the growth, and understanding them is crucial for shaping investment strategies in the utility sector.

Regulatory developments, such as compliance frameworks and financial incentives, can drive the adoption of sustainable AI practices, benefiting utilities that invest in energy-efficient technologies and renewable energy sources. Technological advancements in energy-efficient hardware and data center optimization can further mitigate AI's energy consumption, making utilities that invest in these areas more attractive to investors. Understanding these factors can help shape investment strategies in the utility sector, focusing on companies that are well-positioned to capitalize on the AI boom while adhering to regulatory requirements and technological advancements.