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Utility stocks have long been known as good dividend payers. Many utilities are regulated businesses with highly predictable returns and consistent track records of growth. This enables them to pay consistent and growing dividends. This article will take a broad look at the utility sector, as defined by Zacks.com, and identify some of the top dividend performers.

More than just electric power

The utility sector is actually a diverse sector. A simple way of thinking about it would be to consider all the companies that provide basic services that a home needs. This ranges from water to power to natural gas to communications. Some of these industries, most notably power and gas, are often highly regulated. However, there are a fair number of states that allow competition for electricity. This occurs at a retail level, while the distribution utility (e.g., company that manages the wires to your house) will typically remain a regulated monopoly. This is a natural monopoly since it would be silly and not cost effective to have more than one set of power lines going into a house. An example of a publicly traded retailer would be the Just Energy Group (NYSE:JE), which is based out of Canada. JE competes in key deregulated U.S. markets, including Texas and New York. Other important states are New Jersey, Pennsylvania and Massachusetts. The following table shows the key industries included in the Utility Sector:

Utility Industry Statistics
IndustryAggregate MC ($ Billions)Total CompaniesCompanies Paying DividendPercentAverage Dividend Yield
Regional Wireline Comm.117457%10.0%
Diversified Comm. Services967582645%4.6%
Electric Power964867587%3.9%
Non-US Wireline Comm.285480%3.6%
Water Supply39151387%2.8%
Gas Distribution171292793%2.5%
Electrical Construction115240%1.9%
National Wireline Comm.74250%1.0%
Utility Sector219820915373%

4.1%

Source: Data provided by Zacks.com premium services. Author Calculations. Average dividend yield is calculated on a market capitalization weighted basis and includes companies that do not pay a dividend - their yield would be 0%.

The first observation is that Utilities are indeed a good place to look for dividends. Of the 209 companies in the sector, 73% offer some sort of dividend. The average dividend yield across all 209 companies is 4.1%. If you just look at dividend payers, that yield jumps to 4.4%. What this really says is that the 56 companies that do not pay dividends are actually quite small relative to the other companies. In fact, these companies only represent 8% of the aggregate market capitalization.

The second observation is that even within the Utility Sector, there is a wide range of dividend yields. The Regional Wireline Comm. companies offer a weighted average yield of 10.0%. This industry includes Frontier Communications (NASDAQ:FTR) with a 10% dividend yield and Windstream Corp. (NASDAQ:WIN) with a 11.8% yield. It does not actually include Centurylink Inc. (NYSE:CTL) despite their common grouping with FTR, WIN and CTL as wireline companies with suspiciously high dividend yields. Zacks.com groups them in the National Wireless Industry which is part of the Computer and Technology Sector, but of course that makes sense. The other 5 Regional Wireline Comm. companies are pretty small. Also showing the range of dividend yields is the stark difference between power and gas. While the electric utilities average a 3.9% dividend yield, the gas distribution utilities only offer an average of 2.5%. The following table shows the distribution between these two industries.

(click to enlarge)

Source: Data provided by Zacks.com premium services. Author Calculations.

The above chart shows a slight skew for higher yields in the Electric Power Industry, despite a larger number of companies that don't pay dividends. It should also be noted that the average yield is based on a market capitalization weighting.

The third observation is that some of these sectors might not typically strike investors as utilities. For example, Electrical Construction, which includes companies like MYR Group Inc. (NASDAQ:MYRG) but excludes a Quanta Services Inc. (NYSE:PWR) seems to be further from utilities. Both MYRG and PWR provide contracting services to utilities where they are responsible for installation and maintenance of power lines at both the transmission and distribution level. Yahoo Finance lists PWR and MYRG as competitors. This also highlights the challenges in doing industry screens with data sets.

The fourth point is more of a note than an observation. The industry, Diversified Communication Services, is one of the larger industries, but reflects a range of foreign companies and tiny upstarts. These companies range from the more familiar to dividend investors like France Telecom (FTE) to a little more obscure Hickory Tech Corporation (HTCO), a $140 million market capitalization company in the U.S. providing communication services to retail customers.

Looking at Individual Companies

While the average yields across the industries are interesting, ultimate investment decisions are more for specific companies. The following table shows the top ten dividend yields in the sector among companies with a market capitalization above $500 million. I tend to exclude smaller market capitalization companies from my rankings due to potential liquidity issues and other considerations.

Top Ten Utility Dividend Yields
TickerNameLast CloseMarket Cap ($ Millions)YieldIndustry
FTEFrance Telecom S.A.$ 10.6028,07814.1%Diversified Comm. Services
WINWindstream Corporation$ 8.454,99012.6%Regional Wireline Comm.
FTRFrontier Communications Company$ 4.084,07310.0%Regional Wireline Comm.
AESAYAES TIETE-ADR$ 9.211,8199.6%Electric Power
CNSLConsolidated Communications Holdings, Inc.$ 18.087218.8%Regional Wireline Comm.
DTEGYDEUTSCHE TELEKM$ 11.7350,6898.0%Diversified Comm. Services
TACTransAlta Corporation$ 13.693,5388.0%Electric Power
VIPVimpelCom Ltd.$ 11.2718,3507.9%Diversified Comm. Services
GDFZYGDF SUEZ-ADR$ 20.8050,1876.8%Electric Power
VIVVivo Participacoes S.A.$ 26.2529,4866.5%Diversified Comm. Services

Source: Data provided by Zacks.com premium services. Author Calculations.

This is a starting point list for additional research on these companies. It should be noted that a fair number are foreign companies that might create other tax considerations. Furthermore, these yields do not necessarily mean that the stock is fairly valued. I've been bearish on FTR for a while and FTE has its challenges as well. The follow up article will provide a ranking with adjustments for growth and risk.

Source: The Best Utilities For Dividends, Part 1

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.