Utilities Surge as Growth Stocks Amid Rising AI Demand

The year 2025 may be remembered as a pivotal moment for the utility sector, which has unexpectedly emerged as a leader in stock performance. Traditionally viewed as defensive investments, utility companies are now being recognized as growth stocks, driven largely by increasing electricity demand from artificial intelligence (AI) and data centers. According to data from Ritholtz Wealth Management, utilities rank as the second-best performing sector within the S&P 500 this year, marking a significant shift in investor sentiment.

Utilities are experiencing a remarkable surge in performance, countering the broader market’s trends. In a year characterized by “risk-on” sentiment, where investors typically gravitate towards high-growth sectors, defensive stocks like consumer staples and healthcare have lagged behind. Conversely, utility stocks have not only kept pace with the gains of the Nasdaq and S&P 500 but are thriving. Analysts at Citi have projected that by 2030, data centers could account for as much as 11% of electricity demand in the United States, up from 4.5% today. This anticipated growth is prompting utility companies to invest heavily in infrastructure upgrades to meet rising demand.

Investments Fueling Growth

As utility firms modernize their infrastructure, they are strategically positioning themselves to capitalize on the burgeoning AI market. Significant capital expenditures are being directed towards enhancing capacity and modernizing grid systems. These investments enable utilities to approach regulators for rate increases, which can substantially enhance profit margins and dividend payouts.

For instance, DTE Energy successfully secured a $217 million rate increase this January after approval from the Michigan Public Service Commission, resulting in an additional charge of $4.61 per customer per month. Similarly, WEC Energy Group achieved rate increases of 6.9% and 8.5% for its Wisconsin operations, further illustrating the sector’s financial momentum.

The argument for rate increases often highlights the growing electric demand driven by tech sector advancements and the urgent need for infrastructure spending, particularly concerning wildfire risk management. This combination has fostered a bullish outlook within the utility domain, as municipalities increasingly support grid modernization and environmental initiatives.

Leading Utility Stocks

Several utility companies are emerging as noteworthy players in this evolving landscape. Ameren Corp (AEE), which serves customers in Missouri and Illinois, is actively transitioning to cleaner energy while offering a 2.84% dividend. CenterPoint Energy Inc (CNP) focuses on utility operations in Texas and Indiana, providing a 2.29% dividend while divesting from non-utility ventures.

On the other hand, DTE Energy continues to expand its portfolio, paying a dividend yield of 3.13% while investing in renewable energy projects. WEC Energy Group, with the highest yield among the group at 3.26%, is committed to energy infrastructure development and clean energy initiatives.

Although these companies have historically been considered defensive investments, they are increasingly woven into the fabric of a growth narrative, as their essential services become critical to the AI-driven future. As data center demand rises, these utilities are positioned to play a vital role in powering this technological revolution.

Market Insights and Risk Management

A recent analysis indicated that DTE Energy is particularly attractive, especially following its latest earnings report. Analysts at Wells Fargo raised the company’s price target from $145 to $154, citing strong guidance and management’s confidence in meeting future targets. This trend suggests that investors looking to enter the utility sector should consider a long-term approach rather than short-term trades, especially since the dividend yield contributes significantly to total returns.

Current projections indicate that DTE may increase its dividend yield by 6% to 8% annually through 2030. The company’s payout ratio remains between 50% and 60%, suggesting ample capacity for growth in shareholder returns. For those focused on risk management, maintaining a close watch on the 50-week moving average may provide critical insights into market support trends.

The utility sector’s resilience amidst evolving market conditions demonstrates its potential to adapt and thrive. As the demand for electricity continues to rise, utilities are no longer just defensive plays but are becoming integral components of the growth landscape, driven by technological advancements and infrastructure needs.

This transformation represents a significant opportunity for investors as the sector evolves in tandem with broader economic shifts.