As discussed in my previous article, there are a wide range of utility stocks, as defined by Zacks.com, with many of them providing attractive dividend yields. However, simply chasing a dividend yield can be a costly proposition if that stock is not also fairly valued or is even undervalued. As also noted in the previous article, Zacks.com excludes some companies and groups that one might intuitively expect to be included in this analysis.
Methods to Compare Dividend Paying Stocks
The easiest way to compare dividend paying stocks is the simple consideration of yield. Essentially, for a certain amount of principal, what is the most current income that can be generated. The very simple approach is very easy to explain and for a novice investor might even make sense. However, the first nuance is that dividends change over time. Some companies have a very strong track record of raising their dividends, while others, such as Frontier Communications (FTR) have a record of cutting their dividend. Other companies, look suspiciously more like bonds, neither raising nor lowering their dividends. Investors should definitely consider including dividend growth as a metric and in particular the forward estimate of dividend growth. This estimate should also be reasonable in the context of looking at historical dividend growth. There should also be some consideration of the risk of the principal. There are a couple of ways to think about this. The first is to consider a classic measure of risk, based on the stock's Beta, which can be used to apply to calculate a hurdle rate. Other approaches would include looking at valuation metrics for the stock. So using these metrics, one assumes that more yield is better, more growth is better and less risk is better. So one would want to maximize Forward Yield + Growth - Hurdle Rate.
Leveraging the data from Zacks.com, Yahoo!Finance, and Dividend.com shows the following ranking for the top 20 Utility stocks based on this derived metric:
Best Utilities for Dividends
|Ticker||Name||Zacks.com Yield||Estimated Forward Yield|
|NVE||NV Energy, Inc||3.7%||4.4%|
|JE||Just Energy Group||12.7%||11.4%|
|BIP||Brookfield Infrastructure Partners LP||4.5%||5.1%|
|UNS||UniSource Energy Corporation||3.6%||4.0%|
|SJI||South Jersey Industries, Inc.||3.0%||3.3%|
|CNL||Cleco Power LLC||3.1%||3.5%|
|NEE||NextEra Energy, Inc.||3.3%||3.6%|
|AWR||American States Water Company||2.6%||2.8%|
|CMS||CMS Energy Corporation||3.6%||4.4%|
|WEC||Wisconsin Energy Corporation||3.2%||3.8%|
|NJR||New Jersey Resources Corporation||3.5%||3.7%|
|SO||Southern Company (The)||4.4%||4.6%|
|WTR||Aqua America, Inc.||2.2%||2.3%|
|AWK||American Water Works||2.4%||2.7%|
|OTCPK:TLSYY||Telstra Corp. Ltd||5.7%||6.0%|
It should be noted that in the screening process, I excluded companies with market capitalizations below $100 million. Also, Brookfield Infrastructure Partners LP (BIP) is a partnership and so it makes distributions instead of paying dividends. It should be noted that there are some tax differences between distributions and dividends. The following table shows how the ranking was derived:
Yield, Growth and Risk
|Ticker||Estimated Forward Yield (A)||Beta||LT dividend Growth (B)||Hurdle Rate (C)||Metric (A+B-C)|
The value of the rankings is to see what metric helped drive that stock higher in the rankings. For example, JE has a high ranking based upon a high dividend yield and a very low hurdle rate. However, it has just reduced its dividend payment and operates in a very competitive business. Under these circumstances, an additional subjective assessment might discard it from consideration. OKE topped the rankings due to its high estimated growth rate despite a relatively low dividend yield and beta above 1. OKE has been consistently raising its dividend every two quarters for a while now. One question would be whether this pace can continue to sustain the target of 15% growth.
Analytical Screening Methods have their Limitations
There are a couple of considerations that readers should keep in mind. First, this is an analytical technique applied to data sets from various providers. Unfortunately, I've discovered numerous times in the past that sometimes their data is off. While every effort is made to ensure that the data is accurate, it is not always possible. Second, an analytic approach like this looks only at certain variables and excludes others. Some readers might recognize these as the key variables used in the discounted dividend growth formula, no other valuation metrics were applied. Furthermore, key qualitative aspects were also not considered. As such, you should think of this as a starting point for more research. Perhaps there are some names that you are less familiar with or others that you've not considered in a while.
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.