Commonwealth Edison was the first stock I bought back in the mid 1970’s. Furthermore, I used my lawn mowing and paper route money to make the purchase. Commonwealth Edison is now a division of Exelon (EXC) and, part of the U.S. utility sector. I no longer hold a position in EXC, but I guess you never forget your first date. Most noteworthy, I no longer deliver papers or mow lawns (except my own).
Thus, I have a soft spot for essential service companies. Especially relevant are stocks within the utility sector. These stocks have historically offered great total returns for my portfolio and, I like the dividend income, income growth and price stability that they provide.
Last week I reviewed Dominion (D), and you can read that analysis here: The Lights Are On And Someone Is Home. Dominion is a member of the Dividends Diversify model portfolio. Check out all the holdings in the model portfolio here: Model Portfolio.
Let’s look at some of the positives and potential drawbacks to investing in the utility sector.
- Utilities provide an essential service that we all need no matter the economic environment.
- Utilities operate a business model most everyone can relate to. We all pay our utility bills each month.
- Utilities require large amounts of capital to operate. This creates natural barriers to competition.
- Over the past 3 years, the Dow Jones Utility average index has increased in value by 34%. This compares favorably to the 27% gain in the S&P 500 stock index.
- Utilities operate in a mature industry. As a result, this can limit growth potential.
- Much of the sector is regulated, therefore profit can be limited by government intervention.
- Large capital outlays consume cash flow. Most noteworthy, this is the same cash flow our dividends are paid from.
- Current valuations are high. Especially relevant, U.S. utilities currently have historically high price to earnings ratios averaging 22 times earnings.
- Higher Interest Rates. Most of all, impacts from higher rates can include:
- Increased interest expense resulting in lower profits.
- Increased attractiveness of competing investments.
Here are several of my favorite utility sector stocks:
|Symbol||Company||Recent Dividend Yield|
|AEP||American Electric Power||3.3%|
|NEE||NextEra Energy, Inc.||2.7%|
|SO||The Southern Company||4.8%|
|WEC||Wisconsin Energy Group||3.3%|
Finally, equal positions in this group of stocks would yield about 3.75% and provide an estimated 5.5% annual future dividend growth rate.
In conclusion, next week I will take a closer look at Wisconsin Energy Group (WEC) from a dividend stock analysis perspective. What’s your favorite stock on this list? In addition, do you think it is a good time to initiate or add to any of these positions? Leave a comment and let me know your thoughts.
Disclosure and disclaimer