At a cursory glance, the concept of dividend stocks – particularly in the boring utilities space – seems overly cautious. After all, several risk-on asset classes, including technology-focused securities and cryptocurrencies have soared over the past several weeks. However, not all may be well with the equities space, presenting relevance for the staid but reliable investments.
Primarily, a risk-on pivot materialized due to speculation that the Federal Reserve will raise interest rates sometime next year. While anything’s possible, the robust jobs market presents a surprise headwind. Generally, monetary policymakers deploy interest rate cuts during deflationary cycles, not when the labor market is running at full speed. Therefore, utility stocks with dividends make sense.
No matter what happens – whether we continue on this bull run or if a black swan event changes everything – people need access to energy and critical resources. In other words, we all must pay the bills. That’s the underlying cynicism bolstering dividend-paying utilities stocks.
Plus, no one’s saying not to speculate. But it’s good to have a parachute, just in case. Below are dividend stocks to consider.
Sempra (SRE)
What it is: Headquartered in San Diego, California, Sempra (NYSE:SRE) is a powerhouse among utility stocks with dividends. By covering large portions of the Southern California market, Sempra effectively guarantees itself relevance. Sure, investors must watch out for migration trends and all that jazz. However, as a coastal region with ports to the Pacific Ocean and an international border with Mexico, Sempra is in a prime location.
Relevance: Right now, the company carries a forward dividend yield of 3.22%. To be fair, that’s a bit lower than the sector average of 3.75%. However, Sempra enjoys 20 years of consecutive payout increases. That’s a status that management will want to hold onto. Further, the payout ratio sits at just under 50%, which is reasonable considering the consistency inherent in dividend-paying utilities stocks.
Pros: Analysts appreciate the opportunity, rating Sempra shares a consensus moderate buy. Also, while the average price target is modest at $80.30, the implied 9% upside is decent for a utility.
Cons: While it’s boring, that doesn’t always translate to positive performances. So far, SRE is down about 4% year-to-date, which is kinda disappointing for dividend stocks.
Xcel Energy (XEL)
What it is: Based in Minneapolis, Minnesota, Xcel Energy (NASDAQ:XEL) is a regulated electric utility and natural gas delivery firm. Per its public profile, the company serves more than 3.7 million electric customers and 2.1 million natural gas customers across parts of eight states. With a concentration in the Midwest and western regions of the nation, Xcel benefits from migration trends. More young people are moving to the Midwest for cost-of-living reasons.
Relevance: Presently, Xcel offers a forward yield of 3.4%. Again, it’s a bit lower than average dividend stocks in the utilities space. However, Xcel also features 20 years of consecutive payout increases, something that its leadership team will want to keep going as a strong selling point to investors. Further, its payout ratio comes in at 58.14%, which is decent for the predictable utilities space.
Pros: Analysts view XEL as a consensus moderate buy. On a fundamental level, Xcel should see increased demand as more people move to areas the utility covers. And because utilities command the natural monopoly tailwind, XEL is a name to watch for the long run.
Cons: If you’re looking for big capital gains, XEL isn’t it. Its average price target of $63.64 implies only 4% upside from the time of writing.
Evergy (EVRG)
What it is: Headquartered in Topeka, Kansas, and Kansas City, Missouri, Evergy (NASDAQ:EVRG) is a prime example of investor-owned dividend-paying utility stocks. According to its public profile, Evergy is the largest electric company in Kansas, serving more than 1.7 million residential, commercial, and industrial customers in Kansas and Missouri. Fundamentally, the company benefits from millennial migration as they seek refuge from the high costs of living in major metropolitan areas.
Relevance: One of the most intriguing dividend stocks if you’re focused on the utilities space, Evergy commands a forward yield of 5%. That’s conspicuously above average for the sector. However, you must be prepared to absorb a higher-risk profile given the elevated payout ratio of 67%. Also, the utility lacks an ongoing consecutive track record of rising payouts.
Pros: Again, the millennial migration aspect warrants consideration for Evergy. To sweeten the pot, shares trade at forward earnings multiple of 13.27x, lower than the sector median of 14.66x.
Cons: At the moment, analysts rate EVRG only as a consensus hold. Also, the average price target of $52.20 implies a measly upside potential of less than 2%. Therefore, you really have to love utilities stocks with dividends.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
