Utility companies—those that provide electricity, water, natural gas, and other essential services for residential and commercial customers—have had a banner year. The benchmark Utilities Select Sector SPDR Fund (NYSEARCA: XLU) has climbed by about 31% in the last year, with the bulk of those gains having occurred in the last six months.

Many investors have flocked to utility stocks in recent months in anticipation of the Federal Reserve's first rate cut in several years, which was confirmed at the Federal Open Market Committee meeting in September. With inflation dropping and a cooling jobs market, cautious investors unsure of the impact of the rate cut seek out utility stocks for their defensive capabilities.

Because of their essential nature, utility stocks tend to remain steady even in times of market turmoil. Many also have a strong history of paying out dividends. However, the rapid rise of the AI industry has prompted a surge in electricity demand, with Goldman Sachs estimating data center power demand will grow by 160% through 2030. This marks a major boon for many utility firms as well.

DTE: Strong Financial Position, Infrastructure Investment

DTE Energy Co. (NYSE: DTE) provides electricity and gas service to customers in Michigan and conducts an energy trading business. Despite its limited geographical range, DTE's target area is fast-growing, and demand for power is increasing alongside rapid population and economic growth.

DTE maintains a solid financial position, with operating EPS climbing by 44.4% year-over-year in the most recent quarter, driven by its electricity business. Analysts expect earnings growth to continue, and the company also offers an impressive 15-year history of dividend increases and a solid dividend yield of 3.23%.

This firm is also expanding strategically in terms of its preexisting electricity and gas infrastructure—it has already invested $2 billion in this area this year, with at least another $2 billion to come by the end of the year—and in a burgeoning solar operation. The company broke ground in September on a solar farm that is expected to generate power for 40,000 homes.

PCG: Well-Positioned for Data Center Demand Increase

PG&E Corp. (NYSE: PCG) serves the northern and central regions of California, traditionally a hotspot for tech firms and data center demand. Indeed, in a June investor update, the company noted that data center capacity totaling 3.5GW—enough to power about three million homes—is due to come online by 2030.

Between 2023 and 2040, PG&E expects its overall load to grow by 2-4%, with about half of that coming from data center usage.

Coupled with the anticipated increase in demand is PG&E's relative undervaluing compared with other utility companies. The firm has a forward P/E ratio of 14.6, and analysts have noted an average price target of $21.55, which is almost 9% higher than the current share price.

Together, this makes PG&E both a strong defensive play in case of market upheaval as well as a strategic bet on the growth of AI and cloud computing needs.

VST: Deserving of the Hype?

Vistra Corp. (NYSE: VST) has drawn attention this year as the top-performing stock in the S&P 500, beating out even the likes of chip manufacturing super-stock NVIDIA Corp. (NASDAQ: NVDA) with 1-year returns of nearly 250%. Despite this massive rally, many analysts still rate Vistra as a "Buy," seeing room for additional growth based on the strength of data center demand and the company's acquisition history.

Vistra serves electricity and natural gas customers across the U.S. It is positioned to benefit from growing electricity demand among data center operators through its growing nuclear business.

Vistra recently completed the acquisition of its remaining 15% non-controlling interest in Vistra Vision, its nuclear generation, energy storage, and renewables subsidiary.

With firms like Constellation Energy Corp. (NASDAQ: CEG) planning to focus on nuclear energy to meet data center demand, Vistra's acquisition sets it up to thrive in this space.

Buy-and-Hold Opportunity

Utility stocks like those above represent a buy-and-hold opportunity for investors looking to capitalize on dividends for passive income. Entering positions in utility stocks now may also provide investors access to firms on the cusp of major growth thanks to a wave of new demand requests for electricity to power a fast-growing AI industry.