By Bob Ciura
As 2017 nears its end, it is a good time for investors to evaluate their portfolios. For income investors, the utility sector is a good place to receive secure 3% to 5% dividend yields, and steady dividend increases each year.
We have compiled a list of all dividend-paying stocks from the utility sector. You can see the entire list of 246 utility dividend stocks here.
The following list represents the top 5 utility stocks for 2018, in no particular order. The list is based on the quality of their business models, history of dividend increases, and future dividend growth potential.
Top Utility Dividend Stock #1: Consolidated Edison (ED)
Dividend Yield: 3.2%
ConEd has increased its dividend for 43 consecutive years. It makes the list of top utility stocks, because it is the only utility on the list of Dividend Aristocrats.
The Dividend Aristocrats are a group of 51 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases. You can see all 51 Dividend Aristocrats here.
The company operates as a regulated electric and gas utility.
Source: EEI Finance Conference, page 3
It has over 3 million electric customers, and another 1 million gas customers, in New York. Its businesses include electric, gas, and steam transmission, and green energy.
It has four operating segments:
- Electric (71% of revenue)
- Gas (14% of revenue)
- Steam (5% of revenue)
- Non-Utility (10% of revenue)
Last year, ConEd increased earnings-per-share by 2%, to $4.15. Growth was due to favorable weather, higher electric and gas revenue, and customer additions. ConEd has continued to generate steady growth in 2017. Over the first three quarters, adjusted earnings-per-share increased 1%. For the full year, management expects adjusted earnings-per-share of $4.05 to $4.15 per share.
Earnings could dip slightly this year, as the company accelerates capital spending to modernize its assets and build its renewable energy business. However, the company has a secure 3.2% dividend, with room for annual dividend increases to continue. ConEd held a dividend payout ratio of 62% over the first three quarters of 2017, which indicates strong coverage.
ConEd’s steady growth is due to its focus on regulated operations, which are highly stable. Approximately 93% of ConEd’s revenue comes from regulated businesses. This is an operating advantage because regulated utilities are allowed to pass along rate hikes on a regular basis.
Source: EEI Finance Conference, page 27
Rate increases, along with population and economic growth, gives regulated utilities virtually assured growth. ConEd expects 5.5% compound annual growth in the rate base over the next three years.
Renewable energy is another growth catalyst for ConEd. It has a 1.5-gigawatt renewables business, 75% of which is solar power. The company will invest $1.25 billion in its renewables portfolio through 2019, to accelerate growth in this area.
ConEd also has a strong balance sheet, and will be able to withstand the impact of rising interest rates. It has a manageable debt-to-equity ratio of 52%, and a credit rating of BBB+.
ConEd has an operating history going back more than 100 years. In addition to its 3%+ dividend yield, ConEd earns a place on our list of blue-chip stocks. We have compiled a list of stocks with these two qualities. You can see the full list of blue chip stocks here.
Top Utility Dividend Stock #2: Southern Company (SO)
Dividend Yield: 4.5%
Southern Company has one of the higher yields among the large-cap regulated utility stocks. And, it offers investors annual dividend increases. Southern is not a Dividend Aristocrat, but it is a Dividend Achiever, a group of stocks with 10+ consecutive years of dividend increases. You can see the entire list of all 264 Dividend Achievers here.
Southern has increased its dividend for 16 years in a row, including a 3.6% dividend hike for 2017. The company also operates as an electric and gas utility, serving approximately 9 million customers, primarily in the southeast U.S.
Revenue increased 14% in 2016. Adjusted earnings-per-share were flat for the year. Earnings-per-share declined 4% over the first three quarters of 2017, which the company attributed to the effects of milder weather, and electricity outages experienced during Hurricane Irma. These abnormal weather conditions are not a recurring issue for the company.
The company has gotten off to a good start to 2017—it has beaten analyst estimates, for revenue and earnings, in each of the first three quarters.
Going forward, Southern’s biggest strategic initiative is the massive Vogtle nuclear facilities being constructed by the company’s subsidiary Georgia Power.
Source: Q3 Earnings Presentation, page 13
Southern has high hopes for the Vogtle plant. The new units will feature an advanced pressurized water reactor technology, which the company believes will be safer and more cost-effective.
Vogtle Units 3 and 4 of the project are under construction, and will be the first new nuclear units built in the U.S. in 30 years. Southern expects Unit 3 to be in service by November 2021, and Unit 4 to be in service by November 2022. The net cost of the project is estimated to be $7.1 billion.
Conditions have been more challenging in recent periods, but Southern still expects growth for the full year. The company forecasts adjusted earnings-per-share in a range of $2.90 to $3.02 for 2017. This would represent year-over-year growth of approximately 1%-4% from last year.
This should be enough growth for Southern to continue increasing its dividend. The current dividend payout is secure. The company had a dividend payout ratio of 69% over the first three quarters of 2017. And, because of its 4%+ dividend yield, Southern is a relatively attractive utility stock for its high yield.
Top Utility Dividend Stock #3: Dominion Energy (D)
Dividend Yield: 3.8%
Dominion screens very well as a dividend stock. It has a 3.8% yield backed by sufficient cash flow, and the company has paid dividends for 90 years. Plus, Dominion raises its dividend on a regular basis. Like Southern, Dominion is on the list of Dividend Achievers.
Dominion also earns a place as a top utility stock for 2018, because of its aggressive dividend growth forecast. The company expects to increase its dividend by 10% each year, through 2020. Double-digit dividend increases are hard to find in the utility sector, which makes Dominion a rare dividend-growth utility.
Dominion’s above-average growth is due to a unique business model. Dominion has traditional electric and gas generation and transmission businesses, but it also has a midstream energy business under the name Dominion Midstream (DM). Dominion Midstream is an MLP. You can see the entire list of all 131 MLPs here.
Dominion owns the general partner, and approximately two-thirds of the limited partner. In a way, Dominion is a utility, with a splash of a pipeline MLP mixed in.
Source: Barclays Power Conference, page 3
2016 was a very good year for Dominion. Operating earnings-per-share increased 10% to $3.80.
Going forward, Dominion’s major growth catalyst is its midstream businesses. From 2016 to 2020, Dominion Energy forecasts $7 billion to $8 billion in cash contributions from the midstream business. The $4 billion Cove Point Liquefaction project is nearly 100% complete, and should be a boost to growth once it is fully operational.
Dominion management expects the massive LNG export facility will be placed into service by the end of 2017. According to the company, Cove Point will be able to produce 5.25 million metric tons per year. Dominion has sealed a 20-year supply agreement for the project.
Another growth catalyst is the Greensville County Power Station.
Source: November 2017 Investor Update, page 9
The Greensville plant is a $1.3 billion project, which is 60% complete. Once finished, it will have capacity of 1,588 megawatts. These investments will help the company meet its ambitious growth forecast over the next few years.
Dominion expects earnings growth of 6%-8% per year through 2020. This will allow the company to raise the dividend by 10%, with only a modest expansion of the dividend payout ratio. The company has a payout ratio slightly above 80% of 2017 earnings-per-share.
Top Utility Dividend Stock #4: NextEra Energy (NEE)
Dividend Yield: 2.5%
NextEra might not seem attractive at first, because it has a 2.5% dividend yield. This is relatively low for a utility. However, this is through no fault of its own: NextEra’s low dividend yield is the result of a prolonged rally in the share price, which has lowered its yield. The stock has returned approximately 31% year-to-date.
NextEra is a diversified regulated electric utility. It has total generating capacity of nearly 46,000 megawatts, and operates two businesses: Florida Power & Light, and NextEra Energy Resources LLC.
Florida Power & Light is a rate-regulated electric utility, and serves approximately 5 million customer accounts in Florida.
NextEra has largely moved away from coal. Instead, it has built a large renewable energy business, particularly in wind and solar power.
Source: 2017 Wolfe Research Power & Gas Conference, page 10
NextEra Energy Resources is the world’s largest generator of wind and solar energy, according to the company. The trade-off for NextEra’s fairly low dividend yield, is high growth. NextEra’s adjusted earnings-per-share increased 8.4% in 2016. The company is off to an even better start to the current year. Adjusted earnings-per-share rose 9.2% through the first three quarters of fiscal 2017.
NextEra’s high growth is due to its push into new sources of energy. This leaves plenty of room for growth to continue going forward. NextEra states that it has approximately 16% of the installed base of U.S. wind power production capacity, as well as approximately 11% of the installed base of domestic solar power capacity.
Costs are dropping quickly in the renewable energy industry, while demand continues to rise. The economics of wind and solar have improved rapidly in recent years, which positions NextEra for high growth.
Source: 2017 Wolfe Research Power & Gas Conference, page 9
Through 2020, NextEra management expects the company to grow adjusted earnings by 6% to 8% per year. This will allow the company to continue increasing its dividend at a similar growth rate each year.
NextEra’s aggressive investments in renewable energy are paying off, as the company is growing at a high rate for a utility. Demand continues to rise, and costs have come down considerably over the past several years.
NextEra has a payout ratio slightly below 60%, and a strong balance sheet with a credit rating of ‘A-‘ and a debt-to-capital ratio of 56%. As a result, high-single digit dividend increases should continue, which makes NextEra an attractive utility for dividend growth.
Top Utility Dividend Stock #5: PPL Corp. (PPL)
Dividend Yield: 4.4%
Last but not least, PPL is an electric utility. It earns a place on the list of top utility stocks for 2018, because it offers a high dividend yield, along with growth potential. And, it also provides shareholders with geographic diversification. As the result of a $5 billion merger with a U.K. electricity distribution company several years ago, PPL has a significant presence in the U.K.
Source: EEI Financial Conference, page 4
More than half of PPL’s operating earnings-per-share were derived from the U.K. regulated business last year. The company performed well in 2016. Operating earnings-per-share rose 10% from the previous year, due to growth in the regulated utility businesses. Last year was the 7th year in a row in which PPL exceeded the midpoint of its operating earnings guidance.
2017 has been a difficult year for PPL. The company is coming off a period of elevated capital investment, to modernize its assets. It has invested approximately $3 billion each year to increase efficiency. Plus, unfavorable currency exchange rates and unseasonably warm temperatures in the U.S. have weighed on PPL so far this year. As a result, earnings-per-share declined 8.6% over the first three quarters of 2017.
That said, there is still opportunity for continued growth.
Source: EEI Financial Conference, page 12
The company forecasts 5.6% annual growth in rates through 2020, spread across the U.S. and the U.K. As a result, PPL forecasts 5%-6% annual earnings growth from 2018 through 2020.
PPL distributed approximately two-thirds of earnings last year in dividends, which leaves room for annual dividend increases. PPL increased its dividend by 3.9% in 2017, and the company is targeting 4% annual dividend growth through 2020.
Utility stocks are popular among income investors. There is good reason for this, as utilities have highly stable business models. Electricity and gas generation and transmission are necessities. Consumers will always heat their homes and keep the lights on, even during recessions. This gives utilities the ability to pay dividends, and raise their payouts each year.
ConEd is the only utility on the list of Dividend Aristocrats, but it is not undervalued today. See which other Dividend Aristocrats are confirmed buys with our service Undervalued Aristocrats, which provides actionable buy and sell recommendations on some of the most undervalued dividend growth stocks around. Click here to learn more.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.