A utility play for the coming rate cuts

Rate-sensitive sectors poised for gains

The recent U.S. Federal Reserve conference at Jackson Hole, Wyoming gave investors some clues as to Fed Chair Jerome Powell’s thinking on the pace of interest rate cuts. Since the end of last year, the Fed has effectively been on hold, while other central banks such as the Bank of Canada, Bank of England, and the European Central Bank (ECB) have continued cutting. Now, Powell has signaled that a cut is likely when the Fed holds its next meeting on Sept. 16-17.

The jury is still out on how much of the 10%-39% tariffs imposed on major U.S. trading partners will be passed on to U.S. consumers. However, the recent Consumer Price Index (CPI) and Producer Price Index (PPI) figures for July seemed to show that companies were absorbing at least part of the tariffs rather than passing them all on to their customers.

CPI rose 2.7% on an annual basis in July, the same rate as in June and slightly below the 2.8% rise expected by economists. But the core CPI, excluding food and energy, rose at a higher 3.1% rate. Meanwhile, PPI, which is more volatile than CPI and is regarded as an indicator of what will happen with CPI, rose at a higher than expected 0.9% month-on-month in July (3.3% annualized). That was well above the expected 2.5%.

In the meantime, various candidates for replacing Powell, such as former Fed governor Kevin Warsh and Director of the President’s National Economic Council Kevin Hassett, have publicly called on Powell to reduce interest rates faster. Given this kind of pressure, it seems a reasonable conclusion that U.S. interest rates will be lower by this time next year.

The persistence of CPI inflation above 3.5%, even though numerous signs indicate the real economy is weakening, may be misleading the Fed to remain too tight for too long. All this means that when interest rates do come down, they will come down very rapidly, as the Fed, under a new future Chair, plays catchup. This should further reinforce the strong performance of rate-sensitive sectors like utilities, pipelines, financials, and REITs.

Dominion Energy growing to meet surging demand

One way to diversify utility holdings is by selecting a U.S. utility company, especially as they are major beneficiaries of the boom in data centres being built for the Artificial Intelligence (AI) revolution, which require massive amounts of computing power.

Buying a utility serving an area that is the location of many data centres being built, such as Virginia and Maryland, gives exposure to the growth of the AI phenomenon with the security of a regulated utility-generating base. One such utility is Dominion Energy (NYSE: D), serving a large chunk of Virginia.

Dominion is coming off a corporate restructuring that saw it sell of most if its non-regulated businesses and cut its dividend. It is now reasonably valued compared with other U.S. utilities. It is the largest utility servicing 3.6 million customers in Virginia, North Carolina, and South Carolina and providing regulated natural gas services to 500,000 customers in South Carolina. The company is also one of the leading developers and operators of offshore wind and solar power and the largest producer of carbon-free electricity in New England.

Dominion Energy is a long-established business in an area with rapidly growing demand from data centres, adding to the steady growth in population in the three states in which it operates. Its second-quarter earnings to June 30 rose 38%, to $760 million ($0.88 per share) up from $563 million ($0.64 per share) on revenue of $3.8 billion (up 10%) and operating earnings of $649 million ($0.75), up 15.3% from $567 million ($0.65 per share).

Dominion is best suited for investors willing to accept a smaller likelihood of a rising dividend in the near future in exchange for an initially higher yield and the possibility of substantial growth in earnings over time.

Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management. He is currently Chief Investment Officer of Calgary-based Spire Wealth Management.

Notes and Disclaimer

Content copyright © 2025 by Gavin Graham. This is an edited version of an article that first appeared in The Income Investor newsletter. Used with permission.

The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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