Now Is Time to Buy These “Boring” Stocks!
Three Tips for Finding fhe Best Utility Stocks
High Dividend Utility Stocks #1
Why Are Utility Stocks Doing So Well?
Now is a great time to invest in utility stocks, thanks to low energy prices and strength in the U.S. economy and dollar. Low oil prices have lowered costs for utilities, especially electric company stocks. At the same time, the strong U.S. dollar has made U.S. utility stocks more attractive to investors, since their revenues are entirely domestic. That means their earnings aren’t impacted by foreign exchange rates, and they’re unaffected by weak international economies.
Utility dividend stocks are also attracting investors who are fed up with the low yields on fixed income. Bond yields fell the most in three years last month, frustrating the investors and institutions that rely on fixed income investments to generate yield. Utility stocks with high dividends are an attractive alternative, since many of them yield 5% or more-way more than even 30-year treasuries yield today. And high yield utility stocks exhibit about as close as you can get to bond-like behavior in the equity markets.
Best Utility Stocks To Invest In
So if you’re an investor who wants high yield and relative safety, what are the best dividend-paying utility stocks to buy?
You could buy a utility ETF, like the Utilities SPDR (XLU), which yields 3% and has advanced 18% in six months. XLU primarily holds electric utilities, as well as some diversified energy companies with utility operations. The fund’s largest positions right now are Duke Energy (DUK), NextEra Energy (NEE), Dominion Resources (D), Southern Co (SO), Exelon (EXC) and American Electric Power (AEP).
But if you want above-average performance, you don’t need to buy the whole index, you just want to buy the best utility dividend stocks. You can also screen for only the utility stocks that best fit your own preferences, whether that’s the highest yielders, the safest stocks or the best growers. I screen for the overall best utility stocks by looking at the utility’s earnings, business plan, dividend history and more. Here are some of the specific factors I looks for in top utility stocks.
1) Earnings Growth: While they’re never going to grow fast enough to be hot stocks, utility companies usually operate legal monopolies in their market area, and don’t have to worry about losing customers. So utilities in faster-growing regions usually grow faster than average, while utilities in slower-growing regions may struggle. And economic conditions can temporarily affect demand levels for electricity and other utilities. Long-term, most utilities will experience annual earnings and revenue growth in the mid-single digit range, but finding companies that are temporarily growing faster can give you a nice head start.
2) Low Debt: Utilities often have high debt because they rely on borrowing to maintain and improve their infrastructure. Having more liabilities than assets is okay for a utility, as long as the ratio isn’t too high. You can look at the total debt to capital ratio, which should usually be under 60%, or just check to see that short-term debt (debt maturing in the next two years) is manageable. You can also check the utility’s credit rating, which will indicate the utility’s ability to mange its current debt and secure future financing. Investment-grade-rated utilities (BBB-/Baa3) are generally safe.
3) Risk Factors: Utilities with more unregulated operations will have more unpredictable cash flows than utilities with primarily regulated operations (where rates are set by regional laws or rules). Utilities with large exposure to commodity prices (coal, oil, natural gas) will also have less consistent cash flows. Finally, geographic diversification can make utilities more reliable by cushioning them against regional economic slowdowns.
High Dividend Utility Stock #1
Using these factors and my proprietary dividend stock rating system (the Individualized Retirement Income System, or IRIS) I’ve made a list of my favorite High Dividend Utility Stocks, and will be introducing them to you over the coming weeks.
Today I’ll start with the first pick in the series, Consolidated Edison (ED).
Con Ed (ED) is the electric utility for New York City and the surrounding area. (They’re my electric utility, in fact.) Con Ed has increased its dividend for 41 years in a row, including the latest increase announced last month. The new annual dividend of $2.60, or 65 cents per quarter, is about 3% higher than the previous dividend of $2.52 per year. That’s even better than expected growth, based on ED’s average annual dividend increases of just under 2% over the past five years, and the dividend’s longer-term growth rate of slightly over 1% over the past decade.
This reflects the utility’s slow-and-steady earnings growth; EPS are only expected to increase 2% over the next two years, but cash flow is reliable (90% of operations are regulated). Management recently raised its earnings guidance for 2014, citing improved operational efficiency.
Con Ed’s long-term credit rating is BBB+/A3. The gross profit margin (which reflects efficiency) is very competitive at 69%. Overall, IRIS (my proprietary dividend stock rating system) gives ED a Dividend Growth Rating of 7.0 and a Dividend Safety Rating of 9.9, both out of 10.
By my rough estimate, if I owned 300 shares of ED, the company would send me dividend checks every month that more than covered the utility checks I have to send them. Wouldn’t it be nice to pay the utility company with its own money?
If that sounds tempting, then stay tuned, because I’ll be back soon with another of my top utility stocks, and it just might be yours next time!
Click here to learn more about IRIS and receive additional updates on Consolidated Edison and additional dividend-paying stocks.
Chloe Lutts Jensen
Chief Analyst of Cabot Dividend Investor