Electric Utilities Offer Above Average Yield Growth Potential

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Includes: AEP, BMY, CMS, CNP, CTL, D, DTE, DUK, ETR, LEG, LO, MO, PM, PPL, RAI, SO, T
by: George Fisher

A portion of our portfolios should be in selections made with income as the primary objective. A good rule of thumb is that a minimum of 15% of portfolio value should be categorized as income oriented opportunities, based on the investor’s age and objectives. Many younger investors are so focused on capital gains potential that they bypass the importance of the more conservative nature of income selections.

One approach to income investing is to find dividend paying stocks that offer both higher yield and growth potential. A good benchmark for comparison of income opportunities is the current long Treasury yield, with a minimum of 4.4% overall yield goal. Unlike Treasuries, with their fixed rate coupon rate until maturity (except TIPS), many dividend paying companies raise their payouts, thereby increasing the yield on invested capital and offering the potential for capital appreciation.

One of the advantages of increasing dividends versus level bond interest is the ability of income to maintain purchasing parity with inflation over time.

Mr. David Fish, editor of The Moneypaper and an SA contributor, offers a recap of dividend activity for the S&P 500 for 2010. From this list, it is easy to prioritize by yield and 2010 dividend growth to select candidates with Treasury equivalent yields and growth potential. Screening for companies with current yields of minimum 4.4% and who raised their dividend by a minimum of 1.5% in 2010 produced 19 names.

Investors looking for above average yield with the potential for dividend increases to incorporate into their income portfolio may want to consider reviewing these. The list is almost exclusively electric utilities with a smattering of tobacco and communication companies. Ranked by 2010 dividend growth, the list would be:

Company

Month

Ticker

New Rate

Dividend Change

Dividend Yield

CMS Energy

AUG

CMS

$0.84

40.00%

4.48%

Lorillard Inc

AUG

LO

$4.50

12.50%

5.85%

Entergy Corp

APR

ETR

$3.32

10.67%

4.60%

Philip Morris Intl

SEP

PM

$2.56

10.34%

4.57%

Amer Electric Pwr

OCT

AEP

$1.84

9.52%

5.12%

Reynolds American (adj for 2-for-1)

OCT

RAI

$1.96

8.89%

5.98%

Altria Group

AUG

MO

$1.52

8.57%

6.31%

Dominion Resources

DEC

D

$1.97

7.65%

4.65%

DTE Energy

JUL

DTE

$2.24

5.66%

4.82%

Southern Co

APR

SO

$1.82

4.00%

4.81%


00

Leggett & Platt

AUG

LEG

$1.08

3.85%

4.72%

CenturyTel Inc

FEB

CTL

$2.90

3.57%

6.53%

Bristol-Myers Squibb

DEC

BMY

$1.32

3.13%

5.15%

Altria Group

FEB

MO

$1.40

2.94%

6.31%

Verizon Communications

SEP

VZ

$1.95

2.63%

5.51%

CenterPoint Energy

JAN

CNP

$0.78

2.63%

4.99%

Amer Electric Pwr

APR

AEP

$1.68

2.44%

5.12%

AT&T Inc

DEC

T

$1.72

2.38%

6.16%

Duke Energy

JUN

DUK

$0.98

2.08%

5.56%

PPL Corp

FEB

PPL

$1.40

1.45%

5.31%

Click to enlarge

Higher yielding utilities are often overlooked by investors, but for those with longer-term horizons, an increasing cash yield on invested capital can assist in offsetting slower share price growth when comparing overall returns. Dividend re-investment compounds yield on invested capital increases, enhancing returns over time.

Lists like the above are nice places to begin research. Many companies should be discarded as they probably will not fit your specific investing profile and needs.

I personally find it very satisfying when the yield on invested capital is substantially greater than its current yield. This is achieved through dividend growth, dividend re-investment, and patience over the longer-term.

As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.

Disclosure: I am long AEP and have been a shareholder of AEP since 2009