Dividend Play: Replacing ConEdison with ONEOK Partners

by Dividend Growth Investor | May 30, 2012 10:05 am

I am a passive dividend investor. I purchase quality dividend stocks, with the expectations that I will hold on for decades. I do monitor my investments however, and typically sell when one of these three factors occurs.

I am not a big fan of active dividend investing[1], since it leads to paying taxes on capital gains, transaction costs as well as opens me for the opportunity to make mistakes. Buying a stock that will perform much worse than the stock it just replaced in my portfolio, is one of the items in my decision process that might prevent me from active portfolio management. Dividend investing is not a black and white process[2] however, which is why investors should sometimes act to break their rules, if the right opportunity arises.

Over the past month I sold almost my entire position in Con Edison (NYSE:ED[3]) realizing a substantial profit. I used the proceeds to purchase units of ONEOK Partners (NYSE:OKS[4]). This move resulted in an immediate increase of 10% to the dividend income of the 1.20% or so of my portfolio[5] that was invested in Con Edison (ED).

I had not added any funds to Con Edison since 2010. The low interest rate environment has pushed many investors to chase high yielding utilities stocks to valuation levels that no longer make sense.

Currently, this New York based utility yields 4.10%, and trades at a P/E ratio of 17 times earnings. My average cost on the stock was $44.61, bringing my effective yield on cost[6] to be 5.40%.

Unfortunately, Consolidated Edison has been unable to grow earnings much over the past decade, as EPS increased from $3.13 in 2002 to $3.57 in 2011. The annual dividend has been increased at an annual rate of 2 cents per share since 1996, and is projected to reach $2.44 per share in 2013.

As a regulated utility, Con Edison’s profits are limited by the amount it can charge its customers, which in turn is determined by regulators. Lately, regulators haven’t been particularly generous about utility price hikes, which does not bode well for revenue and profit growth in the long run.

To summarize, I do not see much upside in ConEdison in the current environment, and I do not think that total returns[7] over the next decade are going to be much larger than the amount of current dividend yield.

That being said, I believe the company is a decent hold, particularly for investors who have purchased the stock below $50 per share, as I believe that the dividend will be paid and increased at a super slow rate in the foreseeable future. In a dividend portfolio, having some exposure to the utilities sector could provide refuge to investors if the economy declines again.

Endnotes:
  1. of active dividend investing: http://www.dividendgrowthinvestor.com/2012/01/active-dividend-growth-investing.html
  2. is not a black and white process: http://www.dividendgrowthinvestor.com/2012/02/dividend-investing-is-not-black-or.html
  3. ED: http://studio-5.financialcontent.com/investplace/quote?Symbol=ED
  4. OKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=OKS
  5. of my portfolio: http://www.dividendgrowthinvestor.com/2010/05/dividend-portfolio-for-long-term.html
  6. yield on cost: http://www.dividendgrowthinvestor.com/2009/02/yield-on-cost-matters.html
  7. that total returns: http://www.dividendgrowthinvestor.com/2009/12/capital-gains-for-dividend-investors.html

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