Call me old-fashion but I like my beer cold, my salsa hot and my utility stocks boring.
Unfortunately, the sector has been on a “white-knuckle thrill ride” lately. The Utilities SPDR ETF (XLU) has surged more than 22% this year as investors sought refuge in the sector from the recent market turbulence, sending valuations through the roof.
There are a select few utility stocks, however, that merit a look because the companies either are being overlooked by investors or offer dividends that offer potential for growth.
Here are three utility stocks to power your portfolio.
Utility Stocks to Juice Your Portfolio: Consolidated Edison, Inc. (ED)
Dividend Yield: 3.4%
Payout Ratio: 68%
Growth Rate: 40 years
New York City’s dominant power company, Consolidated Edison, Inc. (ED), doesn’t pay the highest dividend in the world … far from it.
ED stock, though, has increased its payout to shareholders for 40 years, a remarkable feat indeed considering the sea change that has come to the utility sector and the world in general since then.
Even better, with a payout ratio of 68%, ED has plenty of financial flexibility to continue its streak.
ED also is well-managed. It exited the risky power generation arena when deregulation was all the rage and unloaded its interest in the problem-plagued Indian Point nuclear plant in 2001.
Unfortunately, Consolidated Edison is still vulnerable to the weather. That’s why its 2016 earnings guidance, which it recently reaffirmed, has such as broad range ($3.85 to $4.05).
Utility Stocks to Juice Your Portfolio: Duke Energy Corp (DUK)
Dividend Yield: 4%
Payout Ratio: 75%
Growth Rate: nine years
North Carolina company Duke Energy Corp (DUK) hasn’t caught a break lately. During its latest quarter, it was pummeled by mild winter weather in the Carolinas and storm damage in the Midwest.
DUK is in retrenching mode and unloaded its Midwest power generation business to Dynegy Inc. (DYN) last year for $2.8 billion and is in the process of selling its foreign assets. All of these moves will pay off in the long run.
Meanwhile, DUK added to its natural gas holdings last year through the $4.9 billion acquisition of Piedmont Natural Gas, taking advantage of low prices for the commodity.
Utility Stocks to Juice Your Portfolio: PPL Corp (PPL)
Dividend Yield: 4.1%
Payout Ratio: 65%
Dividend Growth: four years
Pennsylvania’s PPL Corp (PPL) probably won’t ring a bell with many investors who don’t live in the Keystone State or the U.K., where it owns four utilities serving 8 million customers.
That’s a pity since PPL’s U.S. utility business is expected to grow 11%-13% through 2018, among the best in the sector.
As for the Brexit, PPL is well hedged against the decline in the pound and recently reaffirmed its earnings guidance for the year. Though about 60 percent of its quarterly earnings are tied to the U.K., U.S. investors need to remember that the Brexit will take years to take shape and may not wind up happening.
If it tries to sell its U.K. business, there probably would be no shortage of buyers. The payout ratio of 65 percent indicates there is plenty of room to grow its dividend.
Utility Stocks to Juice Your Portfolio: Southern Co (SO)
Dividend Yield: 4.1 percent
Payout Ratio: 79 percent
Dividend Growth: 14 years
If I had to pick a favorite in the sector, Southern Co (SO) would be it. The Atlanta-based company is well-run, profitable and blessed with both a friendly regulatory climate and strong economic fundamentals in its service area.
That’s a fancy way of saying that its 9 million utility customers in the South crank up their air conditioning during the blazingly hot and humid summers.
SO stock recently made a shrewd acquisition of a stake in Kinder Morgan Inc’s (KMI) natural gas pipeline for $1.47 billion. Gas is the fuel that will power newest power plants that are going to be built for the next few decades.
Some investors may be uneasy about SO because of the negative publicity about its Kemper clean coal plant in Mississippi — the New York Times recently noted it was $4 billion over budget and years behind schedule.
But with its market capitalization topping $50 billion, SO can afford to take any hits to its bottom line that may come from Kemper.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.