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 their portfolios.
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)||Yield||Payout Ratio|
|Pepco Holdings (NYSE: POM)||7.5%||47.2%|
|Empire District Elec. (NYSE: EDE)||7.1%||54.5%|
|Hawaiian Elec. (NYSE: HE)||6.8%||83.6%|
|UIL Hldgs. Corp. (NYSE: UIL)||6.6%||35.3%|
|Pinnacle West (NYSE: PNW)||6.5%||32.4%|
|Progress Energy (NYSE: PGN)||6.5%||45.9%|
|Unitil Corp. (NYSE: UTL)||6.2%||66.6%|
|Westar Energy (NYSE: WR)||6.2%||34.5%|
|DTE Energy (NYSE: DTE)||6.2%||40.6%|
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 Return||5-Year Return|
|Progress Energy (NYSE: PGN)||+2.2%||+22.2%|
|Unitil Corp. (NYSE: UTL)||+9.1%||+8.9%|
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 portfolios.