- This series is dedicated to building a dividend stock watch list by sector.
- The Utilities sector has by far the highest average dividend yield (3.5%) of any sector in the S&P 500.
- The 5 Utility stocks highlighted below have and average beta of 0.38 and an average dividend yield of 4.2%.
What Is The DIY Dividend Investors Club?
As fellow do-it-yourself investors, we appreciate the power of collective thought. In fact, the primary reason we love contributing articles on Seeking Alpha is the privilege of discussing and analyzing the market with like-minded individuals. To achieve long-term success, investors must keep an open mind and continuously educate themselves and there is a wealth of knowledge to be gained from fellow contributors, commenters and readers on Seeking Alpha.
The DIY Dividend Investors Club series is dedicated to the open discussion and analysis of building and managing a long-term dividend portfolio.
There's really no right or wrong answer when it comes to stock picking methodology. For those of you that are interested, you can read about our investment philosophy here. That said, to help facilitate the stock picking process we are going to build our portfolio "watchlist" by sector (based on the 9 major sectors in the S&P 500 as well as alternative sectors like MLPs, REITs and BDCs). We'll also highlight our "Buy Zones" for each stock. Below is a tentative schedule of the entire series.
Please make sure to "follow" us so that you will be notified when each new article is published and PLEASE participate as much as you can in the comment section below. Often times just as much value is derived from the comments section as the article itself.
- Part 1: Introduction/Portfolio Parameters
- Part 2: Stocks That You Could Buy Today
- Part 3: Consumer Staples / "Buy Zones": GIS | PEP | MO | KMB | CLX
- Part 4: Healthcare / "Buy Zones": JNJ | BMY | BAX | MRK
- Part 5: Utilities/Telecom
- Part 6: Consumer Discretionary
- Part 7: Financials
- Part 8: Technology
- Part 9: Industrials
- Part 10: Materials
- Part 11: Energy
- Part 12: Master Limited Partnerships ("MLP")
- Part 13: Real Estate Investment Trusts ("REIT")
- Part 14: Business Development Companies ("BDC")
- Part 15: Unveiling the Portfolio
While the Utilities sector has underperformed the broader market over the past 5 years, it has by far the highest average dividend yield (3.5%) of any sector in the S&P 500. That said, the Utilities sector is the best performing sector year to date (+19%) as income investors continue to desperately seek stable yield.
From a risk-reward perspective, the Utilities sector has the lowest average beta (0.35) of any sector in the S&P 500. Stocks with low betas tend to be less volatile than the general market, which will help dampen overall portfolio volatility.
Given the characteristics above (higher relative yield and lower relative beta), the Utility sector is another sector that we suggest an "overweight" allocation in (15%-20% of total portfolio).
Note that we lump the Telecom sector in with Utilities when making portfolio allocation decisions. We'll publish a brief follow-up to this article (Part 5b) with a few Telecom stocks to watch.
Stocks We Are Watching In The Sector
Below are 5 Utility stocks that we are watching very closely for a pullback.
New Jersey Resources Corp. (NYSE:NJR)
New Jersey Resources has paid a continuous quarterly dividend to its shareholders since 1952. Recent dividend growth has been very steady as well with 5-year and 10-year CAGRs of 7.1% and 7.0%, respectively. In addition, NJR has very high Financial Stability (74) and Dividend Sustainability (77) ratings for a Utility. This is definitely a stock to keep on your radar!
Wisconsin Energy (NYSE:WEC)
Wisconsin Energy has delivered shareholders a 171% total return over the past five years, and it has increased its dividend at a compound annual rate of 21.1% over that period. In addition, the company still has a very modest payout ratio of 56%, so it has plenty of room to continue to increase its dividend in the future.
Northeast Utilities (NYSE:NU)
Prior to briefly terminating its dividend in 1997 (due to regulatory changes that opened up competition in NU's markets), NU paid a dividend to shareholders for 30 consecutive years without a decrease. Since reinstating the dividend in 1999, the company has increased its distribution every year (including a solid 6.8% increase for 2014). Despite breaking the "golden rule" of many dividend investors (cutting its dividend), we believe NU has reestablished itself since restructuring and the stock warrants consideration in a long-term dividend portfolio.
Dominion Resources (NYSE:D)
Dominion has paid a dividend to its shareholders for 345 consecutive quarters (that is over 86 years if you are doing the math at home). In addition, recent dividend growth has been very steady as well with 5-year and 10-year CAGRs of 7.1% and 5.9%, respectively. This is definitely another utility to keep on your radar!
AmeriGas Partners (NYSE:APU)
Amerigas Partners is a Master Limited Partnership ("MLP") operating as a retail and wholesale distributor of propane gas. The company's 7.8% yield is very attractive, but investors should note the MLP K-1 tax filing requirements. APU has delivered shareholders a 92% total return over the past five years, and it has increased its dividend at a compound annual rate of 6.1% over that period.
What's In The "Buy Zone"?
Given that the Utility sector has been the best performing sector this year, many Utility stocks are currently overbought/overvalued.
As we did with the Parts 3 and 4, we'll publish a separate article for each of these Utility stocks above over the next few days that will include a "Buy Zone" and valuation analysis for each (see links above). Please make sure to "follow" us so that you will be notified real-time when each new article is published.
Any DIY Dividend Portfolio should include several stocks from the Utilities sector. Stocks in this sector tend to be stable dividend payors with low relative betas, which will help dampen overall portfolio volatility.
FEEDBACK REQUEST: Which Utility stocks are currently on your watch list? Which would you buy today? Please comment below!