Dominion Resources (NYSE:D) is a classic conservative power utility with largely regulated operations. Regulated utilities typically have less erratic and sometimes slower profit growth but offer more security to dividend-seeking investors because they are much less likely to cut dividends and much more likely to grow them — the guaranteed rate of return implied by regulation with less competition allows it to happen.
The company was incorporated in 1983. Since then, it has never cut the dividend, which currently yields 3.9%. Dominion has about 27,600 megawatts of generation, 11,000 miles of natural gas transmission, gathering and storage pipeline and 6,100 miles of electric transmission lines. Dominion’s natural gas storage system has a capacity of 947 billion cubic feet — it serves retail energy customers in 14 states.
Even though the dividend has been growing (almost) uninterruptedly since the company was incorporated, the dividend yield has declined somewhat over the past 10 years. This is because, in a massive rally for Treasury bonds, conservative utility stocks tend to see a boost in their share prices and a subsequent fall in their dividend yields (if the share price appreciation is faster than the growth of the dividend).
Ten-year Treasury note yields have from 6.5% in 2000 to the recent low of 1.9%. While Dominion’s dividend yield was almost in double-digits at the time of the Enron collapse that depressed all utility stocks, it has been on an overall steady decline despite the hikes in quarterly dividends. In such situations, dividend yields never fall as much as Treasury yields (which are also manipulated somewhat by the U.S. central bank). Stocks like Dominion with sustainable rising dividends that are double the 10-year Treasury note yield would tend to outperform in such an environment as income-seeking investors gravitate towards them.
The company currently pays out 74% of earnings, so the dividend has a cushion. Sometimes utility companies borrow in the debt market to maintain a dividend payout, which is OK for a quarter or two, but it is generally not a sustainable strategy. Dominion recently had to report a 31% drop in earnings due to natural disaster activity, but this is considered normal and unavoidable — it happens on a regular basis, and it has never had a long-term effect on the ability of the company to maintain its dividend.
