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High-dividend yields are great in this low-interest rate environment. In addition, they are a good way of protecting a portfolio in the event of a market pullback or bear market.

However, finding dividend yields that are larger than average, greater than inflation and sustainable for a long period of time can be tough.

Investors usually look straight to utility stocks to find the yield that they need. Utility companies by their very nature offer products and services that are always in demand, which gives them a strong and predictable cash flow - which is required for a regular dividend payout.

That said, with regulation growing across the utility sector, stocks are starting to feel the pressure as taxes, rising wages and capital costs start to eat into profits that would usually be reserved for dividend payouts.

Unfortunately for dividend investors in Exelon, (NYSE:EXC) the combination of high costs and low revenues have already caused the company to slash its dividend 41%, after a 38% fall in earnings.

So, with Exelon's dividend cut still fresh in investors' minds, how secure are the dividends of other utility providers in the S&P 500?

Teco Energy Inc. (NYSE:TE)

Share Price

EPS

Dividend

Yield

Dividend Cover

$17.4

$1

$0.88

5.1%

1.1

Cash Flow Statement

$US millions

2010

2011

2012

Net Operating Cash Flow

664

754

757

Net Investing Cash Flow

-296

-435

-300

Cash Dividends Paid - Total

-174

-183

-190

Repurchase(Issue) of Common & Preferred Stk.

8

7

4

Issuance of long term debt (Reduction)

(179)

(166)

(122)

Net Financing Cash Flow

-347

-342

-301

Free Cash Flow

0

117

61

First up is TECO holdings. During 2012 the company had EPS of $1 and issued a dividend of 88 cents, which gives the company a dividend cover of 1.1. Although this indicates that the dividend is covered, there is not much, if any room for further dividend growth.

On a cash flow basis, TECO can easily cover its dividend. After deducting investing cash flows from operating cash flows, TECO had about $300 million in cash free to pay the dividend during 2012.

TECO's dividend cost the company just under $200 million during 2012.

Indeed, even after paying out nearly $200 million in dividends during 2012, the company was able to pay off $120 million in debt, and the company still had plenty of free cash left over.

TECO can certainly sustain its dividend and possibly even raise it by 50% as the company has a very healthy cash flow.

FirstEnergy Corp (NYSE:FE)

Share Price

EPS

Dividend

Yield

Dividend Cover

$41.5

$1.85

$2.2

5.3%

0.8

Cash Flow Statement

$US millions

2010

2011

2012

Net Operating Cash Flow

3080

3060

2320

Net Investing Cash Flow

-1950

-956

-3160

Cash Dividends Paid - Total

-670

-881

-920

Repurchase(Issue) of Common & Preferred Stk.

0

0

0

Issuance of long term debt (Reduction)

(294)

(2010)

1779

Net Financing Cash Flow

-983

-2920

807

Free Cash Flow

443

-96

2320

FirstEnergy does not have the same dividend security as TECO. First, the company can only cover its dividend from earnings less than once, indicating that the company cannot afford to continue its dividend payout.

Secondly, a quick look at FirstEnergy's cash flow, shows that the company had to borrow nearly $2 billion during 2012 in order to finance its dividend and pay for its rising investing costs.

FirstEnergy's issuance of debt during 2012 annulled almost all of its debt reduction activities during 2010 and 2011.

Based on 2012's cash flows, I do not believe that FirstEnergy's dividend is sustainable. However, as 2012 is the first year of such poor cash flows, I would wait until the first two quarters of 2013 are complete to further assess the situation.

Entergy Corporation (NYSE:ETR)

Share Price

EPS

Dividend

Yield

Dividend Cover

$63

$4.8

$3.7

5.3%

1.3

Cash Flow Statement

$US millions

2010

2011

2012

Net Operating Cash Flow

3,930

3,130

2,940

Net Investing Cash Flow

-2570

-3450

-3640

Cash Dividends Paid - Total

-624

-610

-612

Repurchase(Issue) of Common & Preferred Stk.

827

218

(113)

Issuance of long term debt (Reduction)

(316)

547

1040

Net Financing Cash Flow

-1770

-282

538

Free Cash Flow

920

-163

-1360

At first glance, Entergy Corp. appears to have the best dividend cover from earnings so far. However, on closer inspection the company does not appear to be able to sustain its dividend.

In particular, during both 2011 and 2012, the company had to issue debt to fund its increasing investment spending and dividend payouts.

Furthermore, during 2012 the company's dividend payout and investing costs exceeded the company's operating cash flow by 30% and the company had to issue $1 billion in debt to make up the difference.

So overall, Entergy cannot sustain its payout.

Pepco Holdings (NYSE:POM)

Share Price

EPS

Dividend

Yield

Dividend Cover

$20.6

$1.1

$1.1

5.2%

1

Cash Flow Statement

$US millions

2010

2011

2012

Net Operating Cash Flow

813

686

592

Net Investing Cash Flow

717

-747

-969

Cash Dividends Paid - Total

-241

-244

-248

Repurchase of (Issue) Common & Preferred Stk.

(40)

(31)

(51)

Issuance of long term debt (Reduction)

(1,340)

165

265

Net Financing Cash Flow

-1560

149

293

Free Cash Flow

-368

-499

-872

Pepco is only just able to cover its dividend by earnings. However, during both 2011 and 2012, the company was spending more money on investing than it had coming in from operations.

Indeed, during 2011 the company spent $1 billion on investing and dividends but only had $686 in operating cash flow.

In addition, Pepco continued its lavish spending habits into 2012 where the company spent nearly $1.2 billion on both dividends and investing but only received $592 million in operating cash flow -- less than half of its expenditure.

Pepco does not look to have a secure dividend.

PPL Corporation (NYSE:PPL)

Overview

2012 EST.

Share price

EPS

Dividend

Yield

Dividend Cover

$40

$2.6

$1.5

4.9%

1.7

Cash Flow Statement

$US millions

2010

2011

2012

Net Operating Cash Flow

2,030

776

2,760

Net Investing Cash Flow

-8230

-668

-3120

Cash Dividends Paid - Total

-566

-641

-833

Repurchase of Common & Preferred Stk.

-54

0

0

Issuance of long term debt (Reduction)

4,520

-200

1,170

Net Financing Cash Flow

6,310

-390

48

Free Cash Flow

-130

-526

-1,170

PPL appears to have the highest dividend cover from earnings in the group.

However, the company has consistently spent more than it could afford every year since 2010. Indeed, during 2010 the company had to issue $4.5 billion of debt just to cover its expenditure.

Meanwhile, during 2012 the company was forced to issue $1.17 billion in debt to cover its expenditure and dividend, even though 2012 was the company's most profitable year.

I believe that PPL could be the company with the most insecure dividend in this group.

Overall

So overall, out of these five companies I would say that only one, Teco Energy has a solid sustainable dividend that can be relied upon. The other companies are all paying out much more than they can realistically afford.

Investors should watch out for potential dividend cuts if the economic situation gets worse, fuel costs start to rise substantially or environmental taxes and regulation start to become significantly more imposing.

Source: Can These Utility Stocks Sustain Their Dividend Yields?