There’s a lot on investor’s plates these days. Issues with trade, lower economic data and the inverted yield curve are just a few of the problems everyone is facing today. As a result, many investors, especially older investors near or in retirement, have started think about portfolio security. Thankfully, utility stocks satisfy this growing need for safety … you just need to know the right ones to pick.
For one thing, utility stocks generally feature stable earnings. Consumers need to heat their homes and keep the power on no matter what the economy is doing. Because of this, many utility stocks pay some hefty dividends. And those dividends can help lower volatility, reduce losses and provide a guaranteed return for investors.
But not all utility stocks are cut from the same cloth.
There have been some dividend blow-ups in the sector, as a few have become over-leveraged and focused on the wrong operating areas. That means investors must choose to buy utility stocks with long dividend histories — through thick and thin — to get the perceived safety of the sector.
With that in mind, here are three utility stocks with years of dividend growth behind them.
UGI Corp (UGI)
Dividend Yield: 2.28%
When it comes to utility stocks, the sector owes a few thanks to UGI Corporation (NYSE:UGI). The firm was the first to adopt the now commonplace utility holding company model. That is, holding a series of regulated assets — like power generation and transmission lines — to provide cash flows for investment in non-regulated ones. And as the “O.G.” in that regard, UGI has become the master at it.
For starters, UGI owns plenty of boring electric and gas operations in the Northeast. These utility holdings churn out plenty of steady cash flows for the utility. The trick is that UGI has smartly used these holdings to build-out an impressive system of tangential assets that provide much bigger profit potential. This includes natural gas pipelines and a global distribution network for liquefied petroleum gas (LPG). More recently, the firm simplified that structure by buying out all the units of its propane MLP AmeriGas (NYSE:APU).
This wide-ranging asset base has been stellar for UGI’s bottom line. Last year was one of the firm’s best fiscal years ever and last quarter continued that growth. Because of the continued success of its holding company model, UGI has been able to pay a dividend for the last 135 years. Moreover, it has been able to raise its dividend for the last 32 years straight. The last increase was a whooping 15.4% jump.
All in all, for investors looking at utility stocks, UGI needs to be at the top of your list.
American Electric Power (AEP)
Dividend Yield: 3.01%
For utility stocks, size matters. A huge operating base means plenty of customers paying for service and that results in a stable base of cash for dividends to be paid out from. That is exactly what mega-utility American Electric Power (NYSE:AEP) does in spades.
AEP is one of the largest electric companies in the entire country. The firm’s 26,000 megawatts worth of generation capacity serves more than 11 states and 5.4 million customers. That’s a lot of utility bills to pay. And it’s that fact that keeps the lights on at AEP. Last year, American Electric managed to pull in more than $16 billion in revenues from its widespread operations.
These revenues have continued to translate into solid earnings-per-share growth and dividend payments. AEP has paid a dividend since its founding in 1910 and since 2003, the utility stock has managed to increase its payout by 91%.
The best part is, the dividends could keep growing.
The problem for AEP has long been its reliance on coal. It’s an old utility. But thanks to recent regulatory moves by the Trump Administration, AEP has more time to decommission and add new capacity to its umbrella. This will help prevent the firm from spending big to fix the problem instantly. That means there will be plenty of cash leftover for dividends.
American Water Works Company (AWK)
Dividend Yield: 1.73%
Often, investors will flock to electric or gas distributors when focusing on utility stocks. However, for long-term dividends, the water sector can’t be beaten. Many of the top water utility stocks have been paying dividends since the 1800’s. This includes American Water Works Company (NYSE:AWK).
But AWK isn’t like most water utilities. It’s the water utility. The firm is the largest water utility providing clean water and wastewater services to more than 15 million people across 46 states and Canada. None of its rivals can match that size and scope. Because of this, AWK has been an earnings and dividend machine, especially over the last few years. Since 2014, EPS have grown at a compounded annual rate of 8.3%, while dividends have increased by over 10% annually.
The best part is that American Water has a plan to boost that further.
Given how essential it is for life, water utilities are some of the most regulated. However, AWK is undergoing a big spending spree to modernized and upgrade its grid. That spending is exactly what regulators like to see before granting an increase in rates. And given a lot of that spending is on tech upgrades to reduce waste, margins should be quite nice for AWK.
That’ll help turn its 1.75% yield into something greater.
At the time of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.