Utilities Offer Defensive Strategy and Stable Income Amidst Late-Cycle Uncertainty

Utilities are a defensive theme with limited innovation and modest growth prospects, offering stability in a late-cycle macro environment. Inflation concerns and tariff-induced uncertainties make them a compelling choice for defense and stability. A portfolio approach to the utility theme is reasonable.

Utilities have emerged as a favored investment theme in the current late-cycle macro environment, characterized by inflation concerns and tariff-induced uncertainties. This defensive sector offers stability and modest growth prospects, making it an attractive option for investors seeking safety and steady income. A portfolio approach to utilities is reasonable, given the limited innovation and modest growth prospects within the sector.

The Utilities Select Sector SPDR Fund (NYSE:XLU) has been a standout performer, up more than 7.7% in 2025, driven by investors seeking out these companies for their defensive qualities, such as consistent cash flows, regulated business models, and essential services. Additionally, the reliable dividends offered by utilities often outpace inflation, providing an attractive income stream [1].

NextEra Energy Inc. (NYSE:NEE) exemplifies the strengths of utilities, with its two complementary business units—Florida Power & Light Company (FPL) and NextEra Energy Resources. FPL serves over five million customers in Florida, while NextEra Energy Resources is one of the world's largest solar and wind energy generators. Despite potential cuts to renewable energy subsidies, NextEra Energy is well-positioned to benefit from the growth in electricity demand needed to power artificial intelligence data centers. The stock has seen a 0.5% increase in 2025, with analysts projecting a 17% increase to $84.55, paired with a 3.16% dividend yield [1].

American Electric Power Company Inc. (NASDAQ:AEP) is another prominent utility stock, serving 11 states and more than 5.6 million customers. With a robust transmission system and 90% of its revenue coming from regulated operations, AEP offers stability and reliable revenue. The company has a long-term strategic plan focused on resilience, sustainability, and renewable energy integration. AEP stock has seen a 12.7% increase in 2025, with analysts projecting 7% earnings growth in the next 12 months and a 3.58% dividend yield [1].

Dominion Energy (NYSE:D) has undergone a significant transformation, with 90% of its revenue now coming from a regulated utility business. After a challenging period, the company has seen a 19.5% increase in the last 12 months and a 6% increase in 2025. Analysts project earnings growth of around 6% in the next 12 months and a 4.67% dividend yield [1].

Reaves Utility Income Trust (NYSE:UTG) is an actively managed utility-oriented portfolio that focuses on quality criteria such as cash flows, management quality, and regulatory moats. UTG offers a stable and high dividend yield of 6.67%, making it an attractive income plan. The fund has shown superior performance compared to other utility portfolios, such as XLU and VPU, over the past five years [2].

In conclusion, utilities offer a compelling case for defense and stability in the current late-cycle macro environment. A portfolio approach to the utility theme is reasonable, given the sector's limited innovation and modest growth prospects. By diversifying into utilities and considering actively managed funds like UTG, investors can achieve a balance between steady income and capital preservation.

References:
[1] https://www.investing.com/analysis/3-utility-stocks-that-combine-income-and-stability-200663114
[2] https://seekingalpha.com/article/4799700-utg-defensive-theme-higher-upside-and-stable-income