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New York isn't just the most populous metropolitan area in the U.S.; it's an iconic American city, with Broadway, the bright lights of Times Square, Wall Street, and much more.
Behind it all is Consolidated Edison (NYSE: ED), the sole provider of electric power across the five boroughs (and Westchester County and portions of New Jersey), but for some reason, this utility stock leads a quiet existence even though the company serves more than 10 million people.
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Perhaps some of ConEd stock's overlooked status is attributable to a dividend yield of 2.9%. That's only negligibly higher than the yield on the State Street Utilities Select Sector SPDR ETF, a bellwether utility exchange-traded fund (ETF). But even without a jaw-dropping yield, this stock deserves more attention.
In terms of this utility stock's dividend yield, it is nearly 200 basis points below where 10-year Treasury yields closed on Friday, Nov. 6. It's possible, if not likely, that some income investors are avoiding the risks of stocks, even defensive utilities, to grab essentially risk-free income from U.S. government debt.
Interest rates are relevant in discussing utility stocks for another reason. The sector is seen as a bond proxy, highlighting its status as a defensive group. However, investors commit to a trade-off with utility stocks. Due to many utilities' high debt loads, the stocks are notoriously sensitive to rising interest rates.
Given the bond-proxy label and a turbulent interest-rate environment, it's understandable that ConEd stock isn't top of mind for some investors. Still, they're missing out because it's displaying strength amid bond market commotion. It's up 25.3% year to date and 13% over the three months ending Nov. 6 -- a period including significant increases in Treasury yields.
Yes, financing costs weigh on earnings growth, but even with that, ConEd is expected to grow earnings at 6% annually over the next three years. That's a pretty solid growth rate in a slow-growth sector. And speaking of growth, this utility serves it up on the payout front. ConEd is a Dividend King, meaning it's one of the companies that have increased their annual dividends for at least 50 years. To be precise, ConEd's streak of payout increases spans 53 years.
Beyond above-average dividend yields, one of the main reasons so many investors have flocked to utility stocks is the increase in power demand driven by artificial intelligence (AI) data centers.
It's a reasonable thesis and one that has rewarded investors. Still, it cuts both ways, carrying the vibe of "everything is an AI trade" while diminishing the defensive appeal of the broader utility sector.
Not all utility stocks have lost their defensive chops. ConEd stands tall in that regard. In fact, Wells Fargo said last month the New York electric power giant represents "defensive diversification away from the broader AI trade." These days, diversification away from AI and the Dividend King label are coveted traits, particularly when they're available under one umbrella.
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Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Consolidated Edison. The Motley Fool has a disclosure policy.
1 Utility Stock Quietly Paying a 3% Yield Investors Keep Overlooking was originally published by The Motley Fool
