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Nathan Parsh
Nathan Parsh
Articles (93) 

3 High-Yield Utility Stocks You Can Buy Today

As the market selloff continues, utility stocks, which hold up well in recessions, are offering higher yields

March 09, 2020 | About:

With the S&P 500 yielding an average of less than 2% and the 10-Year Treasury note offering a yield of just 0.74%, investors depending on income likely need to turn to equites to meet their needs. Fortunately for these investors, dividend yields have gotten higher almost across the entire market as the major indexes have continued to sell.

Investors often like utility companies because they are usually recession proof. A downturn in the economy leads to people keeping a tighter hold of their wallets, but most will still give priority to keeping the lights on. In addition, many utilities offer high dividend yields. Investors thus see these stocks as safe ports in a vicious storm.

The Utilities Select Sector SPDR ETF (XLU) has lost 2.5% over the last month, as even utilities have experienced the pain of the coronavirus selloff. Compared to the 11% decline for the S&P 500, thought, this decline is less severe. Thus, in this article, we will take a look at three utility companies that are currently paying at least a 3.7% dividend yield.

Dominion Energy

Dominion Energy (NYSE:D) has a current dividend yield of 4.34% as of March 9. Previously known as Dominion Resources, Dominion Energy is an electric and gas utility serving 7.5 million customers across 18 states. Dominion Energys regulated utility business produces reliable revenues each year. The company also benefits from its ability to recover capital expenditures through the use of rate hikes. For example, certain capital expenditures in Virginia are recoverable through rate hikes without having to apply for a rate increase. Dominion Energy also has an attractive non-regulated business. The company owns Cove Point in Maryland, a liquefied natural gas facility, which has a 20-year lease agreement to supply LNG to customers in India and Japan.

Dominion Energys market capitalization is presently valued at $72.7 billion. The company has increased its dividend for 17 consecutive years, by an average of:

  • 9.4% per year over the past three years
  • 8.9% per year over the past five years
  • 7.7% per year over the past 10 years

The companys most recent raise was just 2.5% for the upcoming March 20, 2020 payment. While this is below any of the average increases listed above, this was likely done due to the rising payout ratio. Dominion Energy is expected to distribute $3.76 in dividends per share in 2020 while analysts forecast EPS of $4.39 for the year for a payout ratio of 86%. This is higher than the 78% payout ratio that the company has averaged for the last decade.

At the current price of $86.70, Dominion Energy trades at 19.7 times expected EPS for the year, which is slightly higher than the 10-year average price-earnings ratio of 18.8.

Dominion Energy has held up much better than even its own sector ETF, returning 1.7% over the last month as investors view the name as a safe place to park capital. At 2.2 times the S&P 500's dividend yield, this is the highest yield of the three stocks discussed here, making Dominion Energy a solid choice for investors.

Duke Energy Corporation

Duke Energy Corporation (NYSE:DUK) has a current dividend yield of 3.78% as of March 9. The companyprovides electricity and gas to customers in the Midwest and along the Atlantic seaboard, and also provides electricity to 7.6 million customers in Florida, Indiana, Kentucky, North Carolina, Ohio and South Carolina. Duke Energy provides gas to 1.6 million customers in Kentucky, North Carolina, Ohio, South Carolina and Tennessee. It has a 17% econimic stake in a Saudi Arabian company that produces menthol and a gasoline additive that reduces the emission of carbon monoxide.

Shares of Duke Energy trade with a market capitalization of $72.6 billion. Duke Energy has a dividend growth streak of 15 years and has raised the dividend by an average of:

  • 3.7% per year over the past three years
  • 5.5% per year over the past five years
  • 2.9% per year over the past 10 years

Duke Energy is a classic slow and steady dividend grower that most investors think of when they think of utilities. The last increase was for just 1.9%. The annualized dividend of $3.78 for 2020 represents a payout ratio of 72% when using consensus estimates of $5.22 of EPS for the year. This is a solid payout ratio for a utility company and below the 10-year average payout ratio of 79%.

The utility company closed the most recent trading session at $99. Using EPS projections for the year, the stock has a forward price-earnings ratio of 19. This is above the 10-year average price-earnings ratio of 17.1, but slightly below the five-year average price-earnings ratio of 19.2. While Dominion Energy has traded with high teens multiples for much of the last 10 years, Duke Energy has only recently seen its valuation expand.

With a 2.2% return, Duke Energy has outperformed its sector ETF and the broad market over the last 30 days. This shows once again that investors will flock to safety, including names like Duke Energy, in times of panic.

Southern Company

Southern Company (NYSE:SO) has a current dividend yield of 3.71% as of March 19. The utility company provides electricity to 4.6 million customers in Alabama, Georgia and Mississippi. It also supplies gas to 4.2 customers in Georgia, New Jersey, Illinois, Virginia and Tennessee and operates nuclear power plants.

The company has a current market capitalization of $70.5 billion. At 19 years, Southern Company has the longest dividend growth streak on this list. The company has raised its dividend by an average of:

  • 3.4% per year over the past three years
  • 3.4% per year over the past five years
  • 3.6% per year over the past 10 years

The companys most recent raise was 3.3% for the June 6, 2019 payment. When it comes to dividend growth, Southern Company is remarkably consistent, even for a utility company. The company is expected to distribute at least $2.48 in dividends per share this year. Using the average analysts estimate of $3.18 of EPS for 2020, the payout ratio is 78%, which is just above the 10-year average payout ratio of 75%.

Southern Company ended the last trade session at $66.87. Using EPS estimates, the stock trades with a forward price-earnings ratio of 21, the highest multiple on this list. The current valuation is also above the stocks 10-year average price-earnings ratio of 16.2. Unlike the other names on this list, Southern Companys multiple only began to expand over the last year.

Shares of Southern Company have lost 2.9% over the last month, which is a bit more than the sector ETF lost. Dominion Energy and Duke Energy both had lower price-earnings ratios going into the recent selloff, which may explain why those names showed positive returns while Southern Company slumped. Still, the stock offers a solid dividend yield and has a long history of dividend growth.

Final thoughts

Markets have been in freefall and are likely to remain turbulent for the foreseeable future. Those needing income are unlikely to have their needs met by either buying an index fund or purchasing Treasury bonds.

Equities remain the best source of income, with utilities offering very generous dividends. These stocks have also held up decently compared to the S&P 500 due to their recession proof nature and the dividends they pay.

Dominion Energy, Duke Energy and Southern Company are three of my favorite high yield names in the utility sector. While all three are trading at or above their respective five-year average valuations, they each offer a generous yield and have a long track record of dividend growth. Investors looking for income and a safe place to invest in the current environment could do very well with any of these three stocks, in my opinion.

Disclosure: The Author is long Dominion Energy and Southern Company

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About the author:

Nathan Parsh
I was originally born in Detroit, Michigan, before moving to Maryland to begin a career as an educator. This is my 14th year teaching. My wife and I have two young children who keep us on our toes.

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