The 5 Highest-Yielding Utility Stocks in the S&P 500

Utilities stocks occupy a unique niche in the investment world. No one who wants to get rich buying shares of Exelon (NYSE: EXC) or Duke Energy (NYSE: DUK) is expecting to double their money in a few months. That’s because stocks in this heavily-regulated industry tend to be predictable and rarely produce outsized gains.#-ad_banner-#

If you are a dividend investor, however, then utilities stocks have a lot to offer.

Many stocks in this sector carry impressive yields… 4-6% yields are very common. The margin of safety these generous yields provide make utilities stocks especially well-suited for a long-term buy-and-hold strategy. In fact, some of them are perfect candidates to be what we callRetirement Savings Stocks” — stocks that provide a safe, stable and reliable source of high income even if the market goes down.

In addition, utility stocks were heavily penalized last year by falling energy prices and the elimination of the Bush-era tax cuts, which reduced the after-tax value of their dividends. As a result, investors who buy utility shares now may benefit from share price gains as well as rich yields. 

Here is a look at the five highest-yielding utilities.

1. Just Energy
Yield: 13%
Just Energy (NYSE: JE) is a reseller of natural gas and electricity with operations in the United States, Canada and the United Kingdom. The company sells fixed-price or price-protected energy supply contracts to about 4 million customers. 

But extremely high dividend yields are often a sign that something is amiss, and such is the case with Just Energy. The dividend payout has exceeded 150% of the company’s cash flow in the past 12 months, which puts the dividend at risk to be cut. 

Another red flag is Just Energy’s high customer churn rates. Customer attrition has averaged 14% in the past year, while renewal rates for expiring contracts average only 70%. 

During the six months ended last September, Just Energy’s Funds from Operations (FFO) declined 24% to $64.7 million from one year earlier. The company is also highly leveraged, with debt of $955 million, representing more than eight times annual cash flow. Just Energy pays dividends monthly at a $1.24 annual rate and has a poor record for dividend growth.


2. American Midstream Partners
Yield: 10%
American Midstream Partners (NYSE: AMID) provides natural gas gathering, processing and transportation services to customers in the Gulf Coast and Southeastern United States. This growth-focused master limited partnership (MLP) acquired two processing plants last year and is building facilities that will serve producers at the Woodbine field in East Texas. 

Lower volumes due to Hurricane Isaac and scheduled plant downtime resulted in a modest decline in EBITDA, which reached $14.7 million during the first nine months of 2012 from $14.9 million in the same period a year earlier. Distributable cash flow of $8.7 million provided only 72% coverage of the dividend. 

Despite a weak 2012, analysts say capacity additions and a return to normalized volume will fuel three-fold earnings growth for American Midstream in 2014 and 6% annual growth for the next five years. 

American Midstream went public in July 2011 and pays dividends quarterly at a $1.73 annual rate.


3. Atlantic Power
Yield: 9%
Atlantic Power (NYSE: AT) is a Canadian utility that sells electricity to large commercial customers under long-term purchase contracts. The company generates 2,117 megawatts of mostly natural-gas-based power from generating plants in the United States and Canada. 

Atlantic Power has grown through acquisitions. Last year, it merged with Capital Power Income, thereby almost doubling in size. Due to high depreciation charges, Atlantic Power is not currently profitable, but the company expects to turn a profit in 2014. But EBITDA, a more important cash flow measure, rose 134% to $231.8 million during the first nine months of 2012 from a year earlier. Management has confirmed full-year guidance for dividend payout from cash flow in a 90-97% range, suggesting the dividend is sustainable. 

Rising debt is a concern with this company, though. At present, Atlantic Power has $1.9 billion in debt, which amounts to more than 15 times annual cash flow of $112 million. The company pays dividends monthly at a $1.16 annual rate. The dividend was increased 5% last year at the time of the Capital Power merger.


4. Suburban Propane Partners
Yield: 8%
Suburban Propane Partners (NYSE: SPH) is an MLP that provides propane, kerosene and other fuels to homes and businesses. The $1.9 billion acquisition of the retail propane operations of Inergy LP (Nasdaq: NRGY) last year effectively doubled the company’s size and expanded its geographic reach in the Midwest United States. Suburban Propane is currently the country’s third-largest propane marketer, as measured by retail gallons sold.

Last year was extremely challenging for Suburban Propane. Unusually warm temperatures affected volume and triggered a nearly 20% decline in propane prices. As a result, the company’s fiscal 2012 EBITDA for the year ended in September plummeted 40% to $108.5 million from the same period in 2011. Suburban Propane couldn’t cover $121 million of distributions from cash flow, instead relying on funds secured by issuing additional partnership units. 

The board increased the distribution 3% last year to a new annual rate of $3.50 per share, which takes effect in the first quarter of fiscal 2013.


5. Amerigas Partners LP
Yield: 8%
Amerigas Partners (NYSE: APU) is the United States’ largest propane distributor and serves more than 2 million businesses and homes. The company began as the industry’s dominant player last year by acquiring Heritage Propane in a $2.9 billion deal. The Heritage acquisition also brought the company the financial resources of a powerful new partner, Heritage’s former owner, Energy Transfer Partners (NYSE: ETP), who currently owns 32% of Amerigas Partners.

Reflecting the immediate benefits of the merger, this MLP’s fiscal 2012 EBITDA for the year ending in September rose 15% to $384.2 million from a year ago. Amerigas Partners easily covered $272 million of distribution payments last year and management expects fiscal 2013 EBITDA to exceed $630 million, assuming normal temperatures and propane consumption in this year’s heating season. 

The company has a good record for growing distributions, which have risen 40% in six years to an annual rate of $3.20 per share today. The company also occasionally pays special one-time dividends: $0.25 a share in 2007 and $0.17 a share in 2009.

Risks to Consider: Three of these companies are MLPs and thus required to distribute the majority of their income to investors. This means they must rely on debt and dilutive equity to make acquisitions. Investors should also note that MLP distributions are taxed as ordinary income rather than at the lower dividend rate. But because of depreciation allowances, typically 80-90% of the distribution is considered a return of capital, which results in taxes on this portion being deferred until the MLP units are sold.

Action to Take –> My top pick from this list is Amerigas Partners. This MLP offers rising cash flow, strong coverage of its distribution and a great track record for distribution growth. Atlantic Power is also a good pick (albeit slightly more risky). Companies such as Just Energy, Suburban Propane and American Midstream Partners, which aren’t covering their distributions from cash flow, are too risky for my taste.

P.S. — If you’re looking for a smarter, safer, and more profitable approach to income investing than you may be following now, then you need to know about Retirement Savings Stocks. Simply put, if you’re looking for a second income stream for your retirement, then it’s the only way to go. Find out more in this special presentation.