I received so much positive feedback on a recent look at obscure REITs that I decided to take a look at Utilities. Clearly investors are interested in finding alternatives to low-yielding fixed-income securities. While I continue to think that the best long-term answer is to invest in conservative and well-capitalized companies that can actually grow their dividends at a faster rate and are cheaper on a PE basis (and less leveraged financially), I understand why investors like REITs, MLPs and, as I address today, Utilities. Before I share my results of a screen I run, I want to remind readers that I shared my favorable view on the sector in March.
Regulated Utilities have several risks, but they tend to be able to overcome them and ultimately pass their mistakes on to the users rather than investors. Maybe that's too harsh, but we are talking about monopolies. In my view, investors like REITs because they can grow their dividends faster typically than Utilities. These days, that's less certain. With that in mind, I ran a screen looking for attractive candidates in Utilities, but I decided to accept a lower yield than I did on the screen from this weekend with REITs. Generally, with low rates expected to persist for years, I expect Utility dividend yields to push all-time lows.
Here are the parameters:
- Dividend Yield > 4.5% (this yielded 36)
- Market Cap > $100mm (this killed 1)
- Dividend Payout < 100% (this killed 4)
- At least three hikes in the past 5 years (this killed 10)
Here are the 21 that made the cut, sorted on dividend yield [click to enlarge]:
As you can see from the bottom line, the group yields typically 4.7% with 5% annual dividend growth. The payout ratios are typically 57%, but some are paying out substantially higher. Year-to-date, the group has returned typically 10%, in line with the market. Note that over half have raised their dividend each of the past 5 years.
This is not an area that I have typically found to be worthy of much of my time for the two investment models I run, but I do get the chance to discuss Utilities regularly with one of my clients. I also bought two, Allete (NYSE:ALE) and Portland General (NYSE:POR) in the Spring for my Conservative Growth/Balanced Model. I had also put POR in my Top 20 Model Portfolio as the market was peaking. At present, I continue to hold POR in the Conservative Growth/Balanced Model Portfolio. I also had the chance to visit with Northwestern (NYSE:NWE) in South Dakota this summer and believe that they are well managed.
For investors looking for alternatives to fixed-income, I do expect Utilities to provide superior returns. This list might be helpful in identifying potential investments, as I have tried to incorporate some evidence of potential sustainability. One factor not captured is that there is a bit of a cyclical lift for some Utilities, as their industrial customers are again running their factories after slowdowns in 2009. There are many other variables to investigate, particularly pending rate cases and the relationship of the Utility with its regulators. Happy Hunting!
Disclosure: Long POR in a model portfolio