High-Yield Electric Utility Stocks Set for Strong Total Returns

Published Mon, 23 July 2012 12:00 CET by DividendYields.org

When it comes to paying consistently high dividend yields and offering attractive returns on a risk-adjusted basis, hardly any sector can beat electric utilities. And not only do the stocks in the electric utilities sector pay relatively higher yields than other investment vehicles, they also do it by trading with a much lower volatility than the broad market. Now that a meaningful yield is scarce and the economy is descending into recession, investors in pursuit of attractive and stable income should flock to the electric utility sector.

Electric utility stocks are considered defensive, recession-proof equity investments that offer safety during the market's volatile periods. They are the “least economically sensitive of the major equity market sectors,” because their revenue streams and profit outlooks are fairly stable, operational risk are comparably lower, and the demand for power is inelastic. Electric utility stocks are generally less volatile than the broader market, as their financial performance is rather predictable. And, in particular, electric utilities boast dividend yields that well exceed those of the broader market and other industry sectors.

In the current yield-starved environment, the electric utility sector's dividend yield averages 3.5%, which exceeds by full two percentage points the average yield on the broad Russell 2000 index and by almost 1.5 percentage points the average yield on the large-cap S&P 500 index. When compared to the yield on the 10-year Treasury bond, the spread is again more than 2 percentage points wide.

The high spread between electric utility stocks and the 10-year Treasury bond is telling. Historically, the average dividend yield on utility stocks has traded at a slight discount to the 10-Year U.S. Treasury bond yield. Now, the average yield on electric utility stocks is trading at a major premium to the 10-Year U.S. Treasury bond. Empirical research shows that the yield spread premium is as a good leading indicator of returns for utilities stocks. Fidelity Investments thus predicts high total returns for utility stocks in the forthcoming period given that “after yield spreads last peaked in 2003, the utilities sector produced annualized total returns of 18% and 17%, respectively, over the next three- and five-year periods.”

Some consider that the investors' rushing to the high-yielding electric utility stocks has already made the stock prices of electric utilities excessively high. Indeed, the electric utilities sector has traditionally traded below the market, based on the price-earnings ratio. However, today, the overall sector is trading on par with the broad market's P/E of 15.6. While this means that the demand for industry plays has been robust, there are still opportunities to capture high yield at relatively favorable prices. The table below shows several reasonably-priced electric utility plays with long-term earnings growth, high yields above 4%, and payout ratios below 70% of earnings:

Electric Utilities with Long-Term Earnings Growth Table
Income investors should also pay attention to those electric utility stocks that pay relatively high dividend yield on a low payout ratio. Low payout ratios suggest that companies have ample room to boost dividends in the future. In fact, electric utility companies with high dividend yields and low payout ratios have outperformed historically.

There is a potential for income accumulation and stock appreciation in several electric utilities boasting dividend yields above 3% and dividend payout ratios below 50% of earnings. One reasonably-priced play is IdaCorp (NYSE: IDA), a $2.2 billion power utility relying mostly on hydroelectric power. This utility pays a dividend yield of 3.0% on a payout ratio of 40% of earnings. Its P/E of 13.2 times is below that for the overall industry; still, the stock is up 7% over the past year. Another opportunity among these utilities is NextEra Energy (NYSE: NEE). This utility has a market capitalization of $29 billion, a dividend yield of 3.4%, a payout ratio of 47% of earnings, and five-year dividend growth of 8% per year. The stock is trading on a P/E of 14, which is below the average ratio for the industry as a whole.

Electric Utility Stocks with Proven Dividend Growth Table
Investors should also focus on those stocks that have a proven history of raising their dividends. Some examples include Dominion Resources (NYSE: D), Consolidated Edison (NYSE: ED), Duke Energy (NYSE: DUK), FirstEnergy Corp. (NYSE: FE), Northeast Utilities System (NYSE: NU), and UGI Corporation (NYSE: UGI).
Stock name Dividend Yield
Ppl 5.30
Entergy 4.63
Duke Energy 4.57
Firstenergy 4.28
Dominion Resources 4.05
Consolidated Edison 3.72
American Electric Power 3.70
Dte Energy 3.40
Nextera Energy 2.87
Idacorp 2.81
Ugi 2.28

Articles featuring Ppl (PPL):

Utilitly Stocks For Dividend Growth Investors: 2018 Review

I am a dividend growth investor. As such, I want most of my stocks to pay a growing stream of dividends. This year one of my portfolio goals is to increase the amount of resources I have devoted to utilities. I wrote an article about picking utilities last year, so I think it's time to review those picks and how they have done over the last 16 months. What did I think last time? On January 3, 2017, I wrote an article looking at purchasing a bunch of utility company stocks. My article... Read more

Your Utilities Top Yield Stocks Per April Stats

Actionable Conclusions (1-10): Brokers Targeted 11% To 31.6% Net Gains For Top Ten Utilities To April 2019 Seven of ten top dividend-yielding Utilities were verified as being among the top ten gainers for the coming year based on analyst 1-year target prices. (They're tinted gray in the chart above). Thus, the yield-based forecast for Utilities as graded by Wall St. wizards was 70% accurate. Projections based on estimated dividend returns from $1000 invested in the thirty highest... Read more

While Most Dividend Growth Stocks Remain Too Expensive, Here Are 50 That Are Not - Part 1 Of 5

Introduction The Great Recession of 2008 - which ended in the spring of 2009 - brought on one of the greatest and longest bull markets in modern history. For true value-oriented dividend growth investors, the recession created a virtual cornucopia of excellent dividend growth stock investment opportunities that existed until the end of August 2013. However, by the end of 2013 to the current time, most dividend growth stocks have progressively become more and more richly valued. As a result, at... Read more

Top 50 S&P 500 By Yield, Gains And Upside For March

Actionable Conclusions (1-10): Analysts Estimated 14% To 25.5% Net Gains For Ten S&P 500 Dogs To February 2019 Five of ten top S&P 500 dividend dogs by yield were among the top ten gainers for the coming year based on analyst 1-year target prices. (They are tinted gray in the chart above). Thus, this yield-based forecast for S&P 500 dogs was graded by Wall St. Wizards as 50% accurate. Projections were based on estimated dividend returns from $1000 invested in the 30... Read more

Top 2 Of 98 Dividend Achievers: Omega Health By Yield; TransMontaigne For Net Gains In March

Top 30 Dividend Achievers By Yield Represented 8 Business Sectors For March Yield (dividend / price) results from here March 12 verified by YCharts for thirty stocks from eight of eleven Morningstar sectors revealed the actionable conclusions discussed below. "The NASDAQ Dividend Achievers Index is made up of 265 stocks with 10+ consecutive years of dividend increases that meet certain minimum size and liquidity requirements. It is one of the better sources for high quality dividend... Read more