With the markets still uncertain, where should you invest? Do you “buy the dip” in hard-hit stocks, hoping they rebound to past highs? Or do you chase the seemingly-endless rally in big tech names right now? Granted, it might feel like you’re stuck between a rock and a hard place. But what if there was an alternative to both these high-potential, but high-risk, areas?
I’m talking about utilities stocks. You know, those venerable names that offer dependable dividends and low volatility, but aren’t exactly setting the world on fire appreciation-wise.
Sure, you aren’t going to see the 25%, 50%, or even 100% returns of big growth stocks in any of these names. But increasing novel coronavirus case counts could lead to a repeat of the March sell-off. It may be wise to take some risk off the table.
That is to say, low-volatility names could be the place to be. But this isn’t just sage advice for those deeply invested in tech or “V-shaped recovery” names. Income investors should consider the many benefits of utilities stocks right now.
As REITs, energy production and other sectors still face uncertainty, fulfill your thirst for yield with high-percent utilities names. Screening across large caps in this sector, these 7 come to mind as opportunities with reassuring dividends:
- Consolidated Edison (NYSE:ED)
- Dominion Energy (NYSE:D)
- Duke Energy (NYSE:DUK)
- Edison International (NYSE:EIX)
- Exelon Corporation (NASDAQ:EXC)
- PPL Corporation (NYSE:PPL)
- The Southern Company (NYSE:SO)
All seven offer dividends of 4% or greater, a strong selling point in a zero-interest rate world. But more importantly, these low-volatility names with stable dividends are a lower risk area to invest, as market turmoil may or may not continue.
Utilities Stocks With Reassuring Dividends: Consolidated Edison (ED)
This utility, which provides electricity and gas to customers in the New York metropolitan area, hasn’t been immune to the pandemic. Back in May, the company lowered its guidance, after first quarter earnings dipped to $1.13 per share from $1.31 per share the year prior.
Yet this short-term earnings hiccup is mostly reflected in the current share price. Pre-pandemic, ED stock changed hands at prices above $90 per share. Today, even after bouncing off the lows set in March, the stock trades for around $71.50 per share.
In short, there’s plenty of room for shares to go higher, if things wind up turning around much sooner than what’s currently anticipated. But quick gains aren’t the goal here with Con Ed: it’s the high 4.3% dividend yield that should reassure investors.
With a high, but not too high payout ratio (71.6%), and historically modest dividend increases (average of 3.3% over the past five years), expect this venerable name to continue raising its dividend. Especially given the fact that the company has raised it 46 years in a row.
Bottom line: consider this slow-and-steady name one of the best utilities stocks to buy as uncertainty persists in the near-term.
Dominion Energy (D)
As InvestorPlace’s David Moadel wrote May 21, this utilities name has held up relatively well during this crisis. Bouncing back from its March sell-off lows, D stock trades around the same place it was before the pandemic hit the United States.
That doesn’t mean it’s too late to buy into Dominion Energy. The utility giant, which provides power and gas to customers in Virginia and the Carolinas, remains one of the highest-yielding utility stocks out there, with a forward yield of 4.7%. And shares could move higher, as a low-interest rate environment increases demand for stable dividend stocks by income investors.
However, keep in mind the company’s very high dividend payout ratio (86.3%). With so much of the company’s earnings already going towards dividends, there’s a chance the company stops raising its dividend as much as it has in recent years.
But as market uncertainty continues, this is still one of the best lower risk opportunities out there. Consider shares a buy at today’s prices around $80 per share, and a screaming buy if the stock heads lower from here.
Utilities Stocks: Duke Energy (DUK)
Like its neighbor Dominion, this utility name also provides power in the southeastern United States. And similar to its aforementioned peer, DUK stock sports a fairly high dividend yield (4.8%).
Yet Duke Energy remains below its high-water mark set pre-outbreak. Before the crisis, this stock traded above $100 per share. Today? Around $79 per share. So as with Con Ed, this is another dividend play that could bounce back in a quick recovery.
But what if we don’t see a quick recovery? Recent coronavirus news doesn’t bode well for the fading “V-shaped recovery” thesis. But with near-term headwinds like the pandemic priced in, this is yet another stable dividend play to buy in case market turmoil continues.
With a 73.5% payout ratio, there’s still room to grow the current payout. Sure, the company’s consecutive 9 years of dividend growth isn’t exactly impressive. But with a modest dividend growth rate (3.5% over the past five years), the company can easily raise its payout.
Edison International (EIX)
Providing power to Southern California, EIX stock has a lot of fleas, despite a strong dividend yield of 4.7%.
As commentators noted back in April, a lack of market growth, along with California wildfire risks, make this a riskier name, especially when compares to the other utilities stocks mentioned in this article.
That being said, Edison International may be a worthy buy for income investors. First, the company’s payout ratio of 57.6% is fairly low, considering other utilities have payout ratios above 70%. The company’s dividend growth rate remains strong, with a five-year average growth rate of 10.8%.
In other words, if the actual risk winds up being lower than it has been perceived, expect this name to bounce back to its pre-pandemic price levels. Before the crisis, shares traded just above $75 per share. With the stock now changing hands around $55 per share, that’s major potential share price upside in a recovery.
Granted, this may be the riskiest name on this list. But if you are hungry for yield and willing to trade some stability for appreciation potential, keep EIX stock on your shortlist.
Utilities Stocks: Exelon Corporation (EXC)
Like Con Ed and Edison International, EXC stock is another utility name that has yet to recover from its coronavirus lows. Yet, despite also announcing a guidance cut earlier this year, this is another company to keep an eye on.
Why? With a 4.4% dividend yield, low payout ratio of 51.7% and slow but stable dividend growth (3.2% over the past five years), this is another “heads I win, tails I don’t lose as much” opportunity.
That is to say, if things recover sooner than expected, shares could bounce back from today’s prices ($34.75 per share) back to prior levels ($50 per share). If markets continue to trade sideways (or lower), much of the downside risk is priced into shares, meaning it can’t fall much further from here.
In short, another strong consideration for income investors looking for stability, with the potential for appreciation as well.
PPL Corporation (PPL)
As I wrote in a recent article, PPL stock is a strong dividend play, sporting a generous yield. In fact, with its forward yield of 6.6%, this is one of the highest-yielding utilities stocks out there.
So what’s the reason for the discrepancy? Is there more risk with PPL than the 4%-5% yielding names mentioned above?
Yes and no. As I discussed previously, there’s some risk involved with its U.K. operations. The company is U.S.-based, with operations in Pennsylvania and Kentucky. But the operations across the pond make up the largest part of its business.
Nevertheless, with shares today ($25 per share) still trading for 30% below its prior price level ($36 per share), risks may be more than priced into the stock. Like with some of the other names mentioned here, you can get paid while you wait for shares to bounce back. If things recover sooner than later, you could see shares bounce 44% from today’s prices.
If not? Collect the 6.6% yield and bide your time. And don’t worry too much about the dividend heading lower from here.
With a payout ratio of 68% and 20 years of consecutive dividend growth, today’s high yield isn’t the market telling you something’s wrong with this stock. Simply put, it’s fair to call this a deep value utilities stock.
Utilities Stocks: The Southern Company (SO)
Last but not least, SO stock is another stable but high-yielding dividend play for your portfolio. Providing electricity and gas in yes, the southern United States, shares today yield more than 5%.
Yet with this high yield come some concerns. The company’s current payout ratio is 81.6%, which may mean slow dividend growth going forward.
And as our own Louis Navellier wrote last month, The Southern Company has faced hiccups in the past, such as its failed attempt to build the first new nuclear power plant in decades. But with a stable legacy business and the company pursuing opportunities in natural gas and alternative energy, you can’t say future prospects are bleak with this name.
Still more than 25% off its pre-pandemic highs, there’s upside potential to boot with this high-yielding stock as well. In short, SO is another strong contender for investors looking for stable dividends and growth opportunities.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.