Add Steady Dividend Income to Your Portfolio
Electricity is the greatest invention in the history of humankind. It is the linchpin of modern life.
For those of us fortunate enough to live in a developed country, we take the electricity we get out of the walls for granted. But when we lose power for even a short period of time, we realize just how essential it is. Modern society cannot function properly without it. The hellish memories of the Northeast blackout of 2003 are still very fresh in my mind.
As I will explain, the essential nature of utilities makes them superb all-weather investments.
Utes Should Not Be an Afterthought
Just as we take electricity for granted, we also take the companies that supply the power for granted. For most people, the utility company that serves them probably only enters the consciousness when paying the bill every month. But investors, especially conservative ones seeking a steady dividend, should keep them in mind.
Utilities either produce power from their plants, or they purchase power from other companies. According to the U.S. Energy Information Administration, natural gas is the top source of U.S. electricity, at 38%. Coal comes in second at 23%. Nuclear is third at about 20%. And the fastest-growing energy source, renewable energies, as a group comes in at a bit shy of 18%.
The majority of Americans get their electricity from one of about 200 utilities. The number of U.S. publicly-traded electric utilities is smaller, only about three dozen; many of them also supply gas. On average, these electric utility stocks yield about 3%. In today’s ultra-low interest environment where the 10-year Treasury note yields about 0.6%, that’s not shabby at all.
Regulation Limits Growth, But Offers Stability
Electric utilities are generally regulated by federal, state, and local agencies. The agencies control what utility companies can charge customers to protect consumer interest. Regulation limits the utilities’ growth.
On the other hand, regulators are usually lenient and allow utility companies to make a profit over their expense and investments. Plus, governments allow them to act as monopolies since it would be wasteful to have multiple companies lay down redundant expensive infrastructure to serve the same area. As a result, they generate steady revenue and cash flow, making them historically a popular choice as income investments. Many utilities also have non-regulated businesses in addition to their regulated business.
Unregulated Parts Add Some Juice
For example, the largest U.S. utility company by market cap, NextEra Energy (NYSE: NEE), is the third-largest electric utility in the country through its Florida Power and Light division, but it is also the world’s largest generator of solar and wind power through the unregulated NextEra Energy Resources division.
The non-regulated businesses tend to have greater growth potential. The flip side is that they could be more vulnerable to economic ups and downs. Though growth is limited, the regulated utility business is defensive because customers still need to use electricity regardless of economic conditions. (Utilities that supply other essential commodities like gas and water also enjoy this defensive quality.)
Utility stocks aren’t for everyone. Younger investors who seek to grow their portfolios as much as possible and don’t mind taking on higher risks are better off investing in growth stocks. On the other hand, conservative investors—typically older and retired—who want to preserve capital and receive a dividend payment every quarter will want to scoop up some shares.
However, some utilities can give you the best of both worlds. Their stocks offer strong gains and a growing dividend. A prime example is the aforementioned NextEra Energy. Over the past two years, the stock price has risen about 70% and the quarterly dividend has grown from $1.11 to $1.40 per share over that period, a 27% increase.
Regulated, U.S.-based utilities stocks are excellent proxies for dividend growth. Utilities stocks generate steady income, regardless of economic ups and downs or market slumps. During the turmoil caused by the coronavirus pandemic, utilities stocks can add safety, growth and income to your portfolio.
Want our list of the best utilities stocks in America? Click here for details.