Dividend-Paying Utilities for a Well-Rounded Portfolio

A well-rounded dividend investment portfolio just doesn’t happen by accident. As noted in Charlie Munger’s 10 Rules for Investment Success, “Allocate assets wisely: Proper allocation of capital is an investor’s No. 1 job.” It is human nature to want to jump on the what’s hot bandwagon and ignore what is considered boring, like utilities.

Long considered the domain for “widows and orphans”, utilities have developed a somewhat stodgy reputation. Why are utilities considered good for widows and orphans? Here are a few reasons:

1. They are generally less volatile than the market as a whole (low beta)
2. Their products are something that people continue to need and use no matter what the economy is doing, thus
3. Their dividends tend to be more stable and secure.

Utilities would be the perfect dividend income investment, except for one thing - they tend to have low dividend growth rates. As such, you wouldn’t want a whole portfolio of utilities and you need to be very selective in which utilities are added, and when they are purchased. In my personal allocation, utilities are limited to a maximum of 10% of my portfolio (currently, they make up 3.7% of my total investment portfolio).

In addition to the regular buy criteria, I look for a higher yield when buying utilities, generally greater than 5.5%, but I really prefer around 6%. This eliminates many utilities, but there are still several from my Stock Ideas page that might be worth an additional look. Here is a list of all the utilities that have paid a dividend for more than 25 years and have a yield of 5.5% or greater:

Vectren Corp. (VVC) - 6.23% Yield
This energy holding company, headquartered in Evansville, IN, provides natural gas and electric energy to more than one million customers in Indiana and Ohio. It also offers energy related products and services to customers throughout the Midwest and Southeast. It has increased its dividend for 49 consecutive years. It last increased its dividend in November 2007.

Consolidated Edison (ED) - 6.29% yield
This electric and gas utility holding company serves parts of New York, New Jersey and Pennsylvania. With its February 2009 dividend increase, ED has now increased its dividend for the last 36 consecutive years. (most recent analysis)

Otter Tail Corp. (OTTR) - 6.35% yield
The company produces, distributes and sells electric energy in Minnesota, North Dakota and South Dakota and has interests in health services, manufacturing and other businesses. OTTR missed its normal dividend increase in February 2009. Instead, the company left its dividend flat with 2008. The last time OTTR increased its dividend was February 2008.

Integrys Energy Group (TEG) - 7.27% yield
This utility holding company serves about 485,000 regulated electric and 1,674,000 regulated gas customers. The company also operates an unregulated energy supply and services business. With its February 2009 dividend increase, TEG has now increased its dividend for the last 51 consecutive years. (most recent analysis)

Black Hills Corp. (BKH) - 7.48% yield
This diversified South Dakota-based holding company encompasses electric utility and integrated energy businesses. With its February 2009 dividend increase, BHK has now increased its dividend for the last 40 consecutive years. Prior to this last increase, the company went five quarters with no increase dating back to November 2007.

Of the five utilities listed above, I would not consider VVC and OTTR until the future dividend direction can be determined. BKH’s late increase is a little concerning, but I could not disqualify it at this time. I own and am currently purchasing TEG and ED as their valuations and my allocations allow.

Finally, looking at current and some historic returns over shorter periods of time, certain utilities have done quite well. Remember, there is a reason the widows and orphans own them.

Full disclosure: Long ED, TEG

Comments

[xsellside:]

While it's true that utilities have outperformed the broader market recently and historic beta is lower, the sector (IDU as the reference) is still down approximately 40% peak to trough. I call that widow and orphan heart attack territory. Dividends should be safer, but are not immune to cuts (see: GXP, AEE, CEG).

Feb 25 12:43 PM

[Dividend Gr...:]

Interesting list. I am a holder of ED. In my analysis of many utility dividend achievers I have discovered that utilities typically increase dividends in cycles and then abruptly cut them, only to increase them again.
Apart from this however, most retirees like them for the high current yield

Feb 25 03:53 PM

[Gosh137:]

Vectren Corp. (VVC) increased their dividend to $1.34 p/s during December 2008 for the 49th consecutive year. I own it and got the increase.

Feb 25 05:39 PM

[Amouna:]

It says 6.35% on Google finance for VVC. Or is the data wrong or outdated?



On Feb 25 05:39 PM Gosh137 wrote:

> Vectren Corp. (seekingalpha.com/symbo...) increased their
> dividend to $1.34 p/s during December 2008 for the 49th consecutive
> year. I own it and got the increase.

Feb 26 09:04 AM

[romperjon:]

Con Ed NEVER lowered their Divi's ...Spread The Word !

On Feb 25 12:43 PM xsellside wrote:

> While it's true that utilities have outperformed the broader market
> recently and historic beta is lower, the sector (IDU as the reference)
> is still down approximately 40% peak to trough. I call that widow
> and orphan heart attack territory. Dividends should be safer, but
> are not immune to cuts (see: GXP, AEE, CEG).

Feb 26 09:52 AM

[romperjon:]

CoEd NEVER lowered their Divi's !!! Spread the word.

Feb 26 09:54 AM

[Dividend Gr...:]

Con Ed (ED) did cut their dividends in 1974. It has been consistently raising them for over 3 decades now..

Feb 26 11:01 AM

[jack kreg:]

what do you think that Obama's offensive policy's will have on utility's?
-prevent coal plants
-tax CO2 production, only in power plants?
-increased pollution controls?
-coerierced investment in alternatives?

Does all this and associated uncertainty, throw a monkey wrench into what should be income investing for retiree's?

Feb 26 11:47 AM

[kewgardens:]

TEG just blew up today. Projects lowered FY 2009 earnings of only $2.51-$2.66, which is below what is necessary to cover their (recently enhanced!?) $2.72 dividend.

What are your thoughts on TEG now? Is today an overreaction? Is the dividend safe? How much might it be reduced?

And how could the Board have increased the dividend just two weeks below this earnings report?

Feb 26 01:18 PM

[kewgardens:]

By the way, would you recommend increasing one’s position in TEG given today’s drop? If TEG reduces its dividend to $1.68 (65% payout of estimated $2.58 earnings, it would yield approximately 6.1% at current (discounted) prices.

Feb 26 01:36 PM

[Dividends4Life:]

Kewgardens: I am working on a followup post to what happened to TEG. There are some interesting observations to made, and obviously lessons to be learned.

Best Wishes,
D4L

Feb 26 08:33 PM

[stonebluff:]

A few days ago big wigs exercized options at $40 plus per share and promptly disposed of them at the same price in non open market transactions. (Yahoo finance is my authority.) Who acquired those shares?

Feb 27 11:51 PM

[donzelion:]

Why exclude waste & sewage? The main difference for waste & sewage is a shortage of "utilities" in which one can invest (municipalities tend to hold on to these fields more than they do electricity, in part because of the nature of raising capital to start the utility). That said, waste, sewage, and water treatment are every bit as important as electricity, and derive their revenue from roughly comparable models (in many countries, they link electric generation with water management).

Could be that companies like Veolia and WMI are "unsafe" (they've certainly dropped a fair bit), but if you believe the private sector can beat the public sector (esp. municipalities), then these sorts of private plays make sense.

Mar 04 06:30 AM

[GD:]

Divs are nice, but stable asset values are equally important.
Sinc Jan 09, DUK, ED,GXP, NI, PGN,AEP,SO,and more-are all down 15-30%. Already , as mentioned CEG,GXP,AEE have cut divs. Lower, with more to come. Cunsumer demand, and unpayed bills, will cause more to happen. Beware of Utilities now---Watch the earnings reports. Cap and Trade is a killer! In Bonds,a nd CD's

Mar 04 11:06 AM

[ls3487:]

Vectren Corp. (VVC) is a great stock. This article is incorrect when he said VVC has not raised its dividend since Nov. 2007.While the market was tanking in Oct. 2008, Vectren announced a dividend increase which I recieved.Since 1988 I have enjoyed 3 or 4 splits as well as a dividend increase.

Mar 22 05:31 AM