Best Utilities Stocks with High Dividends
Finding a steady and reliable stream of income means looking for companies that would perform well in both a recession and a booming economy. One area that has a long history of rewarding income investors in many different economies is the utilities sector.
The services from the utilities sector are necessities used everyday, including water, electricity, and natural gas. This article will provide the top utility stocks to consider buying in 2017, and the benefits of investing in the utilities sector.
There are opportunities to invest in utilities stocks so your bottom line can benefit from these essential services. But why else should you consider an investment in utilities stocks?
To start a business in the utilities sector is very difficult because it requires a large capital investment to cover infrastructure and construction costs, as well as approval for both land rights and to start the business. Many sectors do not see new major entries because of these constraints.
The utilities sector in particular is prone to this, with companies being in either a monopoly or oligopoly. A monopoly is when a company has the entire market share to themselves, though the government regulates the business to ensure that customers still are treated fairly despite a lack of choices.
An oligopoly is an environment where the large market share is shared between only a few companies. Operating a business in these types of competitive environments is very beneficial to shareholders.
The earnings of utilities companies are very reliable, since they provide services used every day and there is no real change in their market share. Their income is also protected from inflation, since inflation costs are passed down to the end customer. This is why the utilities sector is labeled as being defensive.
Stocks in the utilities sector do not see much change in their daily price because of the above reasons: their safe nature of reliable earnings, protection from inflation, and large market shares. While utilities stocks are often put in the same group as bond investments and certificates of deposit (CDs), the big advantage that utilities stocks have is that they are very liquid and don’t have rules such as a lock-in period, as bonds and CDs tend to have this issue.
So when it comes to utilities stocks, there is a lot for income investors to be excited about. The payment of the dividend is normally very reasonable and safe, due to the aforementioned predictable earnings, and it tends to see an increase, which only raises the average yield on cost for investors. Companies that have a history of upping their dividends tend to see their stock price increase as well.
I have researched the best utilities stocks for 2017 with high yields that investors should consider owning.
List of High-Yield Utility Stocks 2017
|Pattern Energy Group Inc.
|Duke Energy Corp.
|Pembina Pipeline Corporation
|Brookfield Infrastructure Partners L.P.
|National Grid PLC (ADR)
|First Energy Corp.
1. Pattern Energy Group Inc
Pattern Energy Group Inc (NASDAQ:PEGI) is a company that is focused on owning and operating power projects in Canada, Chile, and the United States.
Said projects are all under a contract, adding to the predictably of the earnings. Also, the contracts are long-term agreements which are signed for 20 or 25 years. (Source: “Investor Presentation,” Pattern Energy Group Inc, March 7, 2017.)
This has helped the company increase its dividend and reward shareholders with a high yield. Pattern Energy’s initial public offering (IPO) was in 2012 and the dividend has seen an increase ever since, even rising multiple times in a single year.
The dividend can continue to see growth, provided that the revenue does as well, thanks to PEGI stock’s payout ratio target of 80%. This ratio is the percentage of earnings that will be paid out as dividends.
Another reason for a possible increase in the dividend is a strengthened balance sheet, which has been enjoying reduced debt. This is positive because there will be less obligation to service the debt.
2. Duke Energy Corp
Duke Energy Corp (NYSE:DUK) has operations in many different market segments, such as electric power, natural gas, solar assets, and regulated utilities. DUK stock has made the list of the top utility stocks to consider owning for 2017 for a few reasons.
An investment in DUK stock may look very appealing, given it is trading at a price-to-earnings (P/E) ratio that is approximately 50% below that of the industry average. After all, the lower this ratio (the trading price divided by annual earnings) is, the better it is for investors.
Duke also looks better when comparing metrics. Its gross margins, operating margins, and profit margins are all higher than the industry average. Note that I believe that, since it is one of the largest companies in its market segment, investors are looking to invest into smaller companies instead of this one.
DUK stock’s dividend policy is reviewed in July of each year, with an annual dividend increase for the past 10 years.
3. Pembina Pipeline Corp
Pembina Pipeline Corp (NYSE:PBA) is a company that is focused on the transportation of oil and natural gas. Its assets are spread across North America.
Pembina’s volatility is three quarters of that of the overall market, based on their respective betas. PBA stock has a beta of 0.76, while the market is 1.0. This means that if the market fell by one percentage point, PPL stock should fall by approximately by 0.76%.
PBA stock is a unique dividend-paying stock. The dividend is paid on a monthly basis and grows regularly. This trend of dividend increases doesn’t look to be stopping anytime soon, going by the net income—which on an upward trend—and Pembina’s income being inflation-protected.
4. Brookfield Infrastructure Partners L.P.
Brookfield Infrastructure Partners L.P. (NYSE:BIP) is a unique company with assets in utilities, such as the supply and storage of natural gas and electricity. Brookfield also has assets in communications infrastructure, which includes media broadcasting and telecom services. The presence of BIP is global, operating in North and South America, Europe, and Asia.
Management has three goals for their company. The first is to have a diversified portfolio, since each asset provides a different rate of return on the investment. This way, a strong sector can offset a negative return elsewhere.
Second, the assets must have high barriers to entry. This would protect the assets from losing revenue to reduced market share.
Lastly, the assets need to be easy to understand when it comes to operations and financials. It is very important for shareholders to understand what they own in your portfolio.
The dividend has seen growth every year since the company became public. The target growth rate of the dividend is between five and nine percent, which the company has delivered on in the past. (Source: “Investor Fact Sheet,” Brookfield Infrastructure Partners L.P., last accessed March 14, 2017.)
5. Southern Co
Southern Co (NYSE:SO) is a holding company with assets in electric, marketing, wholesale gas services, and natural gas distribution.
SO stock is great for income investors for two reasons. One, the stock pays its shareholders a regular quarterly dividend that has also increased annually for 15 straight years. Further, approximately three-quarters of the earnings are paid out.
Two, Southern Co has very low volatility. The beta for SO stock is 0.11, meaning there is no need to worry about the stock’s daily movement.
6. National Grid plc (ADR)
National Grid plc (ADR) (NYSE:NGG) is engaged in the transmission and distribution of electricity and gas. The company is based in the U.K., and the locations of its assets are in the U.K. and the U.S.
Since National Grid operates in two different countries, it generates revenue in both the pound and the greenback. This could result in an added revenue source based on foreign exchange. And when one currency is unfavorable to convert the money into, it could sit in a savings account earning interest until the time is right.
NGG stock pays its dividend on a semi-annual basis, and the shares are yielding 4.97%.
7. FirstEnergy Corp.
First Energy Corp. (NYSE:FE) is a holding company that owns electricity assets, which are sold to customers on retail and wholesale levels.
FE stock rewards its shareholders in two ways: a quarterly dividend and share buybacks. The latter method does not add money to investors’ pockets, but does leave them owning a larger percentage of the company. FirstEnergy share repurchases have left fewer available overall, so each remaining share is worth a greater portion of the business.
Ultimately, both methods end up affecting an investor’s net worth in a positive way.