For income investors, there is beauty in boring. And you can’t get much more boring than utility stocks. Electricity, gas and water demand pretty much is constant — in good times and in bad. After all, you still need to heat your home and take a shower no matter what the economy is doing. That consistency results in stable revenues, cash flows and ultimately, dividends for investors that have significant staying power.
It’s no wonder why they call utility stocks “widow and orphan” companies.
But don’t be fooled, utility stocks still have plenty of growth in them. New forays into alternative energy, smart grid and energy logistics have given many utility stocks plenty of mojo. Mojo that’s translated into some big time capital gains as well. The sector proxy — the Utilities SPDR (ETF) (XLU) — is up 55% over the last five years.
Big dividends and capital appreciation potential? Sign me up. And other income investors should be signing as well. Utility stocks may look boring, but they could be your portfolios best friend.
Here are three seemingly boring utility stocks with staying power.
Boring Utility Stocks With Staying Power: NextEra Energy Inc (NEE)
Dividend Yield: 2.9%
Investors may not consider a 2.9% dividend yield that huge. But consider this: Utility stock NextEra Energy Inc (NEE) has managed to grow that dividend 148% since 2005. And it has plenty of opportunities to grow that dividend further into the future.
That’s because NEE is building a utility to last the long haul. The firm has taken a huge plunge into renewable energy and boasts one of the largest portfolios of wind, solar and co-generation plants in the entire U.S. That huge portfolio — and the juicy tax credits that go with it — have already helped power earnings in previous years.
Boosting that renewable commitment further has been its purchase of green energy-heavy utility Hawaiian Electric Industries, Inc. (HE) as well as its yieldco NextEra Energy Partners LP (NEP). Stuffing all those wind turbines and solar farms into NEP results in tax-advantaged dividends for NEE. The real beauty of doing this is that NEE estimates that gas-related infrastructure and generation and renewable energy will drive earnings growth of as much as 10% per year.
And given just how shareholder friendly NEE’s management is, that “paltry” 2.9% dividend could be worth a lot more down the road. For investors, NextEra is one of best utility stocks you can own.
Boring Utility Stocks With Staying Power: FirstEnergy Corp. (FE)
Dividend Yield: 4%
Cutting a dividend is pretty taboo for utility stocks. So back in 2014, when FirstEnergy Corp. (FE) slashed its payout, investors weren’t so pleased. The problem was that First Energy was more exposed to wholesale energy prices.
Since that time, FE hasn’t done anything with that dividend and kept it at the same payout amount.
But what it has done is start to revamp its business model. Gone is the focus on wholesale electricity prices. It has been replaced with plenty of regulated electricity exposure, which isn’t subject to huge price fluctuations. FE is also undertaking the task of modernizing its fleet of generation assets — which is important since more than 50% of its current portfolio is coal related — as well as boosting its transmission assets.
All of these “Energizing the Future” items are designed to cut future costs and help grow earnings. FE is already starting to see some of the benefits of this fruit: Total operating cash flows have improved over the last few years since the cut.
For investors, it means that this utility stock could finally be getting its act together and could return to dividend growth in the near term.
Boring Utility Stocks With Staying Power: Exelon Corporation (EXC)
Dividend Yield: 3.5%
After nearly two years and a nasty dividend cut, Exelon Corporation (EXC) is now king of the utility stocks. Its recently closed deal to buy rival Pepco Holdings, Inc. (POM) has made it the largest utility in the United States based on the amount of customers.
The massive deal with POM is amazing for EXC as it removes many of the reasons why it cut its dividend in the first place — namely, pricing risk.
EXC was one of largest merchant power utility stocks. And as a leader in this area, its business — and cash flows — were determined by variable pricing of electricity. In boom times, it’s a great business. During busts, not so much.
To reinvent itself, EXC purchased Constellation Energy Group, Inc. and now, Pepco. That makes it a much more balanced utility — featuring a now even split between regulated and merchant power operations. That provides steady earnings as well as the potential for boosts during pricing peaks. What’s even better is that Exelon is coal free and features zero generation facilities using the fuel. That frees it from a bunch of nasty potential regulation.
That will help it reduce costs over the longer term.
The reinvention has another big win for investors: more cash to shareholders. EXC’s payout ratio is now down to just 50% — leaving plenty of room for an increase.