The utilities sector doubles up as a fallback option for investors during recessions and economic downturns because of its reputation for rewarding shareholders with dividends. Likewise, they fall out of favor during times of economic growth, with growth stocks driving the markets.

Utility sector stocks are defensive in nature and are very slightly affected, if at all, by market volatility. Even during the 2008 global economic crisis, they had held their own. Utility stocks are examples of such defensive instruments that protect investments when the goings are not good. Whatever the state of the economy, a household or a business needs its electricity, water, or gas supplies.

The market expects interest rate cuts in September to mark the first loosening of grip on monetary policy since tightening started in early 2022. The central bank wants to analyze further economic data on jobs, inflation and various sectors before embarking on rate cuts. In fact, expectations are that there will be at least two rate cuts announced this year.

Inflation has cooled down significantly in recent months. On Wednesday, the consumer price index report showcased that inflation had cooled for the fifth straight month and hit a 43-month low at 2.5% year over year in August. The jobs market has slowed down as well, albeit remaining robust and resilient. It looks very likely that once the Fed takes the plunge, rates will come down fast.

After the 2008 sub-prime crisis, the Fed cut interest rates to stimulate the economy. On cue, investors flocked to utilities, which are viable defensive choices during macroeconomic downturns. There is no reason why history will not repeat itself. The sector has done very well this year already, with the S&P 500 Select Sector SPDR (XLU) advancing 22.4% year to date as of Aug. 31, 2024.

In addition, utilities are usually considered long-term buy-and-hold options as they regularly declare dividends, and dividend yields on utility stocks are generally higher than those paid by other equities. In this environment, utility stocks provide much-required stability and growth potential. Hence, astute investors should consider such stocks at present.

Our Choices

The stocks below flaunt a Zacks Rank #1 (Strong Buy) or Rank #2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here, V stands for Value, G for Growth and M for Momentum. The score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. You can see the complete list of today’s Zacks #1 Rank stocks here.

DTE Energy Company (DTE Quick QuoteDTE - Free Report) is an integrated utility company. DTE’s expected earnings growth rate for the current year is 16.9%. The Zacks Consensus Estimate for its current-year earnings has improved 0.2% over the past 60 days. This Zacks Rank #2 company has a VGM Score of B.

UGI Corporation (UGI Quick QuoteUGI - Free Report) is an integrated gas distributor and markets energy products and related services. UGI’s expected earnings growth rate for the current year is 3.2%. The Zacks Consensus Estimate for its current-year earnings has improved 0.3% over the past 60 days. This Zacks Rank #2 company has a VGM Score of A.

Northwest Natural Holding Company (NWN Quick QuoteNWN - Free Report) is a natural gas distribution, pipeline and storage company. NWN’s expected earnings growth rate for the next year is 26.3%. The Zacks Consensus Estimate for its next-year earnings has improved 1.8% over the past 60 days. This Zacks Rank #2 company has a VGM Score of B.

Veolia Environnement SA (VEOEY Quick QuoteVEOEY - Free Report) provides water, waste and energy management solutions globally. VEOEY’s expected earnings growth rate for the current year is 207%. The Zacks Consensus Estimate for its current-year earnings has remained unchanged over the past 60 days. This Zacks Rank #2 company has a VGM Score of B.