Rules for Utility Stocks.
This is part two of a two-part series on utilities. Utilities are an often-ignored investment opportunity. They can be low or no growth investments. Some utilities have great growth prospects, and they pay a respectable dividend. In the interest of full disclosure, here are the utilities in our investment portfolio:
The average person might look at this list and want to buy Dominion Energy (D). A dividend yield of 4.39% is very attractive in a low-interest-rate environment. We have 100 shares of D. But we have more than twice as many shares of NEE which only pays 1.98%. I addition, the price of shares of D is much lower than NEE’s per share price. I could buy more shares of D for the investment I have in NEE and generate more income. Why do I have a greater investment in NEE?
The following images from Seeking Alpha help explain why. First, notice the 10-year dividend growth rate for NEE. It is better than 10% per year. A ten percent raise every year is a good thing.
Then notice some information on this Seeking Alpha screen. The payout ratio for NEE is considerably less than most utilities. This means there is room for even more growth in the dividend, assuming NEE prospers in the future. NEE has also been increasing dividends for 24 years. This means the business has an admirable track record for increasing dividends.
Finally, compare NEE with D and DUK. If you look only at yield you want D or DUK. But if you want the longest history of dividend growth (24 years) and the best payout ratio for growth (59.67%), the best Dividend Growth 3YR (12.84%) and the best Dividend Growth 5YR (11.51%) then NEE wins the race.
Obviously, there are other factors to consider when buying an investment. For utilities, however, doing some comparison shopping using these metrics can help you focus on 2-3 good candidates.
Some things you would want to consider include:
Utilities have a place in your portfolio. You probably have some if you own a mutual fund or an ETF that pays a dividend. In fact, ETF VYM is 8.81% utilities. DVY is 25.45% utilities. Even DGRO has a small slice of the utility sector.