Top 5 Utility Stocks to Watch in 2017
May 17, 2017
Utility Stocks 2017
Are you considering investing in companies that provide services that are needed in both booming economies and recessions? Then you want stocks with an ownership position. These are not only companies that generate steady income, but they preserve investments via the share price.
I am going to focus on such businesses in this article. These utility stocks also pay reliable dividends, which only adds to their appeal.
Below I will be going through a list of utility stocks that pay dividends and should be considered for potential investment opportunities. But, before getting into detail about specific names, I have outlined the characteristics of utility stocks and how owning them benefits your portfolio
Characteristics of Utility Stocks
Utilities stocks are defensive in nature because their services are required no matter the economic environment. These include electricity, gas, water, and communication services. Providing necessities keeps net stocks’ revenue and net income very steady and stable.
Being a shareholder in utility stocks means owning stocks that pay a dividend, with a stock price that sees very little daily volatility. This is thanks to the stable, predictable earnings, as utilities companies tend to operate in either a monopoly or oligopoly, with specific government regulations in place to ensure fairness for consumers.
Monopoly means that only one company operates in the market segment. This is normally because it would inefficient to have multiple operations in the same segment. Monopolized services are the likes of telephone wires, water pipelines, and electric lines.
An oligopoly has a few companies in the same market, with the market share split between them. These companies see more competition because their markets are much larger, requiring more consumer options.
Advantages of Investing in Utility Stocks
1. Utilities Are Very Liquid
Due to the stability of utility stocks, they are often compared to other stable investments like bonds and certificates of deposit (CDs). That said, the liquidity of utility stocks is greatly different from that of bonds and CDs.
Utility stocks are very easy to get in and out of–in a matter of minutes, in fact–and can be bought at the price you desire. In contrast, with bonds, it is at times difficult to find a buyer or seller, which could result in a long delay, or in settling for a disadvantageous price. Meanwhile, CDs come with a set interest rate payout and a specific holding period, the breaking of which could result in receiving lower interest.
2. Tax-Advantaged Investment
Another benefit of owning utility stocks over bonds and CDs is the tax rate on generated income. However, their real benefits present themselves only to long-term investors.
Bond and CD investors receive an interest payment, which is taxed as ordinary income. Ordinary income is taxed at a higher rate than that of dividend income received from utility stocks. By owning utility stocks over a long period, you get to keep more of your money (for more information, click here).
3. Steady and Reliable Income
Since the revenue and net income of utilities are very steady and predictable, so are the dividend payments. Also, since the stock itself is not volatile, it adds even more of a total return with the initial income and stock price appreciation. This increases the probability of the dividend being safe.
A lot of the cost with utility companies occurs at the very beginning of the business. After that, there are not many costs outside of general maintenance of the assets. The result is a high percentage of earnings being paid out
4. Inflation-Protected Returns
Utilities are used by everyone and, when the price increases for these utilities, it is normally based on inflation. This is because running the business leads to a cost increase, which gets passed to the end consumer. This keeps the revenue growing and the business margins strong.
This gradually shows up in the price of the stock. In many cases, the dividend would be regularly reviewed by management, leading to an increase.
5. Performs Well in a Market Downturn
When the economy is going through a recession, the stock market tends to see negative returns and volatility. But the great thing about utility stocks is that they remain steady, with investors giving them more consideration due to the stocks being a reliable income source. With this being said, utilities stocks tend to outperform volatile investments and the overall market. This adds to one of the important aspects when looking at any investment, which is the preservation of money in the stock.
6. Business Model Is Easy to Understand
Regardless of your investing experience, the business model should be very easy to grasp, so easy it could be explained to a non-investor. If a business model is difficult to understand, I would highly recommend staying away, since you won’t be able to comprehend the business’ future outlook.
Utility Stocks List
| Company Name | Ticker | Price | Yield |
| Star Gas Partners LP | SGU | $9.73 | 4.52% |
| Aqua America Inc. | WTR | $31.76 | 2.41% |
| Brookfield Infrastructure Partners L.P. | BIP | $39.87 | 4.36% |
| Pattern Energy Group Inc. | PEGI | $21.60 | 7.67% |
| Brookfield Renewable Partners LP | BEP | $31.46 | 5.94% |
1. Star Gas Partners LP
Star Gas Partners LP (NYSE:SGU) is engaged in providing heating oil and propane to residential and commercial customers in the Northeast, Central, and Southeast areas of the U.S.
SGU stock enjoys a cheap valuation when compared to its industry peers, with a price-to-earnings (P/E) ratio of 20.5 times, compared to the industry average of 39.4 times. A company normally trades at a lower P/E ratio than others in its industry when there is something wrong with the business’s efficiency and/or financial statements.
What’s more, there seems to be a couple of important aspects of Star Gas missed by investors and the market. More specifically, the company’s gross margins, operating margins, and profit margins indicate that it is run far more efficiently than others in the market. In addition, debt is clearly being used wisely, being lower than the average amount of debt held by competitors.
SGU stock’s dividend is paid on a quarterly basis. Said payment has both remained steady and has seen growth over time. The dividend is reviewed every April.
2. Aqua America Inc
Aqua America Inc (NYSE:WTR) is a major player on water utility stocks lists. One of the largest water-based utility companies in the U.S., Aqua America operates in nine states, servicing more than three million people. The business primarily supplies water to households, offers wastewater services, and constructs water pipelines as part of a joint venture.
Aqua America enjoys minimal competition in the water utility space in its areas of operation, keeping revenue steady and growing. However, the company refuses to rest on its laurels, and it works to grow the business further.
The company has made more than 10 acquisitions each year for the past seven years; 2016 saw 19 alone, which are sure to benefit the business. The companies purchased operate in the same areas that Aqua America already operates in, strengthening its foothold in those areas. (Source: “Aqua America Completed 19 Acquisitions in 2016; Nine in 4Q,” Aqua America Inc, January 13, 2017.)
WTR stock’s dividend has seen 26 increases over the past 25 years. The company has also never missed a payment for each of the prior 72 years.
3. Brookfield Infrastructure Partners L.P.
Brookfield Infrastructure Partners L.P. (NYSE:BIP) is a very unique utility company because of its diversification in assets such as electricity and natural gas distribution, telecommunications, and infrastructure. These assets are located around the world, including North America, Asia, and Europe.
So, why is BIP stock one of the potential best utility stocks for 2017?
Well, for one, its administration is very experienced and focused on delivering business growth and shareholder value, as shown by past returns. Over the past five years, BIP stock has generated a 20% annual average return. This is higher than the five-year average of the S&P 500 Index and the S&P 500 Utilities Index.
The outperformance is because Brookfield only owns high-quality assets. If a potential investment does not meet the company’s strict criteria, then management simply moves on to the next. For an asset to be considered it must sport stable cash flows, high margins, and strong growth potential.
Brookfield also prioritizes rewarding shareholders, since they are part owners of the business. This is done via the dividend payment, which sees growth of five to nine percent annually. The company also ensures to pay out at least 60% to 70% of its cash flow as the dividend. Therefore, any inflation incurred should be reflected in the dividend. (Source: “Investor Fact Sheet,” Brookfield Infrastructure Partners L.P., last accessed May 14, 2017.)
4. Pattern Energy Group Inc
Pattern Energy Group Inc (NASDAQ:PEGI) owns and operates wind power projects in the U.S., Canada, and Chile.
PEGI stock is one of the notable high-yield utility stocks, currently offering a yield of 7.67%. And, even though the yield is already high, it still sees an increase a few times a year. For instance, the dividend has seen an increase seven times over the past two years alone. Yes, you are reading this correctly. Owning a stock that sees frequent dividend increases, such as Pattern Energy Group’s, means that the more time spent in the stock, the higher the yield based on the average purchase price.
A major reason for so many dividend hikes is the number of long-term fixed contracts to provide electricity to customers currently in place. Also factored in is that, as the cost of running the business increases, the charges applied to the end customer are also higher. With the growing revenue, Pattern Energy Group can afford to reward its shareholders with a high, growing dividend. (Source: “Pattern Energy Group Inc.,” MarketWatch, last accessed May 14,2017.)
5. Brookfield Renewable Partners LP
A member of the electric utility stocks list, Brookfield Renewable Partners LP (NYSE:BEP) is an owner and operator of assets that generate electricity from a renewable source. The company is divided into several segments, including “Wind” and “Hydroelectric,” which accounts for about 90% of revenue. The assets are located around the world, in areas such as North America, Europe, and Brazil.
One of the high-dividend utility stocks, Brookfield Renewable Partners has a high yield of 5.94%, paid annually. The divided growth comes in the form of an annual raise in the payout per share, historically in the five-to-nine-percent range.
The high yield on BEP stock is because 92% of the company’s revenue is coming from its contracts, which average 17 years in length. These make more accurate financial forecasts of future cash flow possible. (Source: “Investor Fact Sheet,” Brookfield Renewable Partners LP, last accessed May 14, 2017.)
Another reason for the high payout is the company’s strong financial discipline. Its heads ensure that the debt does not get out of control to the point that assets would have to be sold to pay back the loans. Also, when investments are made via acquisition, the cash flow of the investment is necessary to ensure that investors are satisfied and the assets fit the portfolio well.
