Searching for Income? Stay Away From Most Electric Utility Stocks

Electric utility stocks have long been considered a safe haven for income-oriented investors. These companies usually pay high dividends and the regulated nature of their business means it is unlikely they will engage in high-risk behavior that creates large losses.

Today, though, we see the almost desperate chase for income leading to these stocks being purchased for the dividends without much thought for the underlying fundamentals of the individual companies.

And the truth is that the economic and regulatory backdrop for electric utility companies is not very favorable and investors should be selling — not buying — these former safe-haven stocks.

While Wall Street is still pushing these stocks for growth and income portfolios, Portfolio Grader is telling us a different story. Quite simply, electric utility stocks are not seeing the type of earnings growth and cash flow generation that would justify their purchase at current prices.

Several of the electric utilities are struggling to the point that Portfolio Grader gives them each an F. Stocks on the “strong sell” list include Hawaiian Electric (HE), FirstEnergy (FE) and The Southern Company (SO).

Still, I was able to find two electric utility stocks that currently qualify as a “buy.” Black Hills Corp. (BKH) serves customers in South Dakota, Montana, Colorado and Wyoming. The region is one of the strongest economically because of shale oil and gas operations that have provided high-paying jobs in the region.

Demand is so strong that the company is building a new plant to serve its fast-growing customer base in Wyoming and South Dakota. The new plant should be online in 2014 and should be a contributor to continued earnings and cash flow growth for Black Hills. The shares are rated B by Portfolio Grader.

The other stock to buy is OGE Energy (OGE), which serves customers in Oklahoma and parts of Arkansas. The big news here is that the company is combing its pipeline assets with those of Centerpoint Energy (CNP) to create a master limited partnership.

The MLP should go public later his year and OGE will own 28% of the new entity. The cash flow from the partnership should help drive additional earnings growth at the company. The stock is currently ranked a “buy” by Portfolio Grader.

Of course, it’s important to note that these two buy-rated stocks have lower dividends than the average electric company and are more growth than income investments.

The bottom line: Most utility stocks are a poor choice for traditional safe-haven, income-oriented investors. If you have utility stocks in your portfolio, use Portfolio Grader to find which you should be selling.

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