In the "Dividend Alternatives" series, I suggest replacements for the stodgy old dividend stocks investors may have collecting dust in their portfolios. Today, I take aim at Consolidated Edison (ED).
Consolidated Edison has been providing utilities to New Yorkers for more than 180 years. The company has increased its dividend every year since 1974, making it a Dividend Aristocrat and somewhat of a darling among income investors. Unfortunately, Consolidated Edison's celebrated tradition of issuing dividend hikes has one major flaw: The increases are miniscule! The company has raised its dividend rate by a total of just 9.17% since 2000, and shareholders haven't seen a raise of more than 3% since 1994.
Most dividend investors aren't jumping out of their seats to replace a "sure thing" like Consolidated Edison. So before I began my research, I was sure to to lay out some stringent criteria in order to come up with the best candidate possible. I needed a replacement with: A dividend yield comparable to Consolidated Edison's, a recent history of strong dividend growth, an obvious willingness to continue that dividend growth, and the financial firepower to achieve such a thing. I also needed the company to have significant exposure to utilities, in order to appropriately fill the void left by Consolidated Edison.
So, what did I come up with? ONEOK, Inc. (OKE).
ONEOK is a diversified energy company which, through its subsidiaries, gathers, transports, stores, and distributes natural gas to more than two million customers in Oklahoma, Kansas, and Texas. ONEOK is a Fortune 500 company that was founded in 1906, and yet the company has been experiencing startup-like growth over the last decade - and paying its shareholders accordingly.
Since 2001, the company has nearly tripled the amount it pays to shareholders each year, increasing its dividend rate from $0.69 to $1.84 over that span. Comparing ONEOK's total dividend growth since 2001 to Consolidated Edison's provides a staggering visual:
ONEOK's board of directors seems focused on continuing the trend. They've given nine dividend hikes since 2006, including two this year, raising ONEOK's quarterly payout from $0.42 to $0.44 in January and announcing another upgrade to $0.46 per share in July. That's a cumulative raise of 9.52% over the last nine months, more than Consolidated Edison has given its shareholders over the last nine years.
Currently ONEOK offers a yield (4.13%) comparable to Consolidated Edison's (4.88%), and seems poised to leapfrog it in the near future. Despite the overwhelming disparity in recent dividend hikes, ONEOK actually has a lower forward payout ratio (60%) than Consolidated Edison (70%), leaving more room for dividend growth. Keeping its payout ratio manageable can largely be attributed to ONEOK's ability to grow its revenue by an average of 23% annually since 2001, dwarfing Consolidated Edison's average figure of just 4%. This year looks to be much of the same, as the average analyst has ONEOK pegged for 30% growth, while Consolidated Edison looks to grow by about 6%.
Disclosure: No positions