- The stock market has been exceptionally volatile lately.
- In this environment, stability becomes extremely valuable.
- Southern Company's stable business and rock-solid dividend are excellent margins of safety.
The stock market has experienced some volatile swings lately. There are plenty of reasons for this, the most concerning of which is that geopolitical risk has reared its ugly head again. This has to do with the ongoing conflicts across the globe, and the poor economic data out of Europe.
The end result is that stocks are swinging wildly once again. For investors who can't stomach the ups and downs of the stock market, but don't want to put their savings into a bank account that pays little to no interest, the utility sector should interest you right now.
If you're weary of headline risk right now, you should consider Southern Company (NYSE:SO) for its high dividend yield, which is backed by a stable business that generates dependable profits.
Several margins of safety
Southern Company generates electricity in the United States. It isn't exposed to the turmoil and geopolitical risk going on across the world right now. And, its business is a necessity for our daily lives.
That means that no matter what's happening in the broader global economy, people need to keep the lights on. This results in stable earnings generation and a rock-solid dividend yield.
American Electric and Duke Energy are solid choices themselves, and they pay good dividend yields as well. Southern Company's yield approaches 5%, however, while Duke and AEP yield 4.3% and 3.9%, respectively.
In addition, Southern Company is not aggressively valued. The stock trades for 14 times forward earnings, which is not a screaming bargain, but represents a discount to the market multiple. This means downside risk is not alarmingly high.
Southern Company's earnings are representation of its stability. Profits over the first half of the year are up 16%, due mostly to an improved operating climate in its core geographic areas.
Southern Company's critical region is the southeast, and fortunately management is seeing firming economic conditions there. Sales to industrial customers in this area of the country came in better than expected, and as a result management is fairly optimistic for the rest of the year.
Good performance in underlying earnings should greatly limit any downside risk in Southern's ability to pay its dividend. The company's payout ratio over the first half of the year is 78%, which is a little on the high side but not overly concerning, because a utility's profits are more stable than the average company's.
Assuming management predictions are accurate, growth over the back half of the year should even support another dividend increase next year, which would be in-line with its track record.
This means Southern Company should maintain its reputation as being a reliable source of dependable profits and steady dividend payments. To that end, the company has paid a quarterly dividend for 267 consecutive quarters, a streak that goes all the way back to 1948.
Why Southern Company is a good choice now
Utility stocks are very popular among investors, particularly income-seekers such as those in or nearing retirement. Southern Company, like many of its peers, holds an impressive track record of paying dividends each and every quarter, and even bumping up its dividend every year.
Southern Company is able to do this because it generates reliable profits. Electricity is essential for society.
While utilities often get lost in the conversation in times of rallying bull markets, in times like these, their value is truly seen.
In volatile markets like we are seeing currently, Southern Company has a lot to offer. Its stock price is less volatile than the overall market thanks to its stable business, and its hefty dividend provides an extra margin of safety.