If you think "widow and orphan" utility stocks are boring, then
you've never heard of this one.
It's an electric utility that has increased its dividend each year
for the past 20 years. Not only does it offer its shareholders an
above-average yield, it also has outperformed its peers in the
toughest economic environment in decades.
That's pretty far from "boring" these days. In fact, this may be
the most exciting company serious income investors could add to
The nation needs power in good times and bad, and that's one reason
power companies tend to be reliable, resilient investments. They
don't offer much growth, but they compensate for that with strong
dividend yields. And there are capital gains to be had: Utilities'
prices tend to trend upward over the long term.
That's a combination income investors like. And with those
factors in mind, here's the one utility they should like the most
right now, the one that outperforms its competitors.
How did I find this winner? By examining the nation's utilities and
crossing off any company that didn't meet my standards.
I started with the critical premise that all income investors begin
with: Show me the money. Below is a list of electric utilities that
yield above 6%.
It's best to take dividends one step further. Don't stop with
the yield -- take a look at how easy it is for the company to meet
its dividend payment. In the chart below, the third column shows
each utilities payout ratio. This is calculated using the
companies' operating income and dividend payment from the
most-recent quarter. If you like, you can put the payout ratio in
the blank in this sentence: "This company paid out ____ of its
operating earnings in dividends."
Company (Ticker)YieldPayout RatioPepco Holdings (
)7.5%47.2%Empire District Elec. (
)7.1%54.5%Hawaiian Elec. (
)6.8%83.6%UIL Hldgs. Corp. (
)6.6%35.3%Pinnacle West (
)6.5%32.4%Progress Energy (
)6.5%45.9%Unitil Corp. (
)6.2%66.6%Westar Energy (
)6.2%34.5%DTE Energy (
It doesn't look like any of these utilities is up against the wall
and in the untenable position of being forced to cut its dividend.
(Hawaiian Electric may be a little too close for comfort for some
conservative investors.) Also keep in mind that companies with low
payout ratios have more breathing room and may be able to increase
their dividends in the future.
Dividend safety is only part of the story, though. Defensive
stocks should move up with the market and also demonstrate
resilience during downturns. The past year has been a stress test
for all stocks. Let's see which utilities passed.
The total return of the S&P during the past three years is
-15.4%. We need companies that not only beat the S&P but also
posted positive total returns. After all, what good is a 6%
dividend yield if the underlying security that produced it loses
half its value?
When I applied those criteria to our list, two utilities remained
in our competition.
Company (Ticker)3-Year Return5-Year ReturnProgress Energy (
)+2.2%+22.2%Unitil Corp. (
Progress Energy and Unitil are the only two high-yielding utilities
that managed a gain during the past three years, an impressive feat
considering the 2008 bear market.
Two things give Progress the upper hand.
First, it has a better dividend coverage ratio, meaning it's
less likely to cut its dividend and has more room to raise it. In
fact, it's the only company out of the original eight that could
cover its dividend with its net income.
Given this, it might not surprise you to learn that Progress has
an impressive 20-year streak of annual dividend increases.
Second, Progress Energy's five-year total return beats out
Unitil by an impressive 14 percentage points. Tack on the higher
yield, and investors can buy a stock that give them a bigger
paycheck and one likely to continue to outperform its peers.
Recent news points to a bright future. Progress will be allowed to
charge higher rates in Florida in January. This will be a
significant revenue booster, as more than half its 3.1 million
customers are in Florida.
Progress has outperformed its peers in tough economic times and
has a track record of increasing dividends. Investors looking for a
safe, reliable 6.5% yield could consider adding Progress to their
Francisco E. Bermea