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I previously wrote an article that looked at low beta, high yield dividend stocks. The initial screen provided over 200 potential candidates from which I quickly narrowed it to around 150 stocks with some basic screens. I then focused in on several common names to examine what impact they would have as an addition to an equity portfolio.

However, by choosing common names including McDonald’s Corp. (NYSE:MCD), Exxon Mobil Corp. (NYSE:XOM) and Wal-Mart Stores, Inc. (NYSE:WMT), I ignored some higher yielding stocks and also did not focus on any sector in particular.

The focus of this article will be to revisit these companies and look more carefully at the utility stocks as defined by Zacks.com. A full 32 utility stocks made the final list for consideration. These companies ranged from Chesapeake Utilities Corporation (NYSE:CPK), with a market capitalization of $367 million, to Nippon Telegraph and Telephone Corporation (NYSE:NTT), with a market capitalization around $66 billion.

The list also excluded interesting companies that might be worth considering including France Telecom (FTE), which has a slightly higher beta. Since my previous article noted that equal betas do not necessarily imply equal reductions in portfolio volatility, I’ve included FTE for comparison.

Here is a list of all 33 stocks (FTE included) ranked by dividend yield:

Select Utility Stocks

Ticker

Name

Beta

Dividend Yield 3/3/2011

Market Cap 3/3/2011 ($millions)

AT

Atlantic Power Corporation

0.08

7.0%

1,036

FTE

France Telecom

0.71

5.9%

59,410

PPL

PPL Corporation

0.47

5.4%

12,459

DUK

Duke Energy Corporation

0.44

5.4%

24,031

PGN

Progress Energy Inc.

0.39

5.4%

13,491

VVC

Vectren Corporation

0.41

5.1%

2,212

ED

Consolidated Edison Company of New York, Inc.

0.29

4.8%

14,572

SO

Southern Company (The)

0.35

4.8%

31,741

AGL

AGL Resources, Inc.

0.45

4.6%

3,048

CHG

CH Energy Group, Inc.

0.40

4.4%

776

XEL

Xcel Energy Inc.

0.44

4.2%

11,551

LG

Laclede Group, Inc.

0.08

4.2%

872

CHT

Chunghwa Telecom Co Ltd

0.38

4.2%

23,234

PCG

Pacific Gas & Electric Co.

0.33

3.9%

18,331

WGL

WGL Holdings Inc

0.25

3.9%

1,970

NST

NSTAR

0.32

3.8%

4,683

PNY

Piedmont Natural Gas Company, Inc.

0.25

3.7%

2,184

MGEE

MGE Energy Inc.

0.28

3.7%

945

NWN

Northwest Natural Gas Company

0.31

3.6%

1,288

GAS

Nicor Inc.

0.50

3.5%

2,434

WEC

Wisconsin Energy Corporation

0.35

3.5%

6,996

CWT

California Water Service Group Holding

0.30

3.4%

747

NJR

NewJersey Resources Corporation

0.19

3.4%

1,770

CPK

Chesapeake Utilities Corporation

0.42

3.2%

387

IDA

IDACORP, Inc.

0.44

3.2%

1,874

AWK

American Water Works

0.35

3.1%

4,941

AWR

American States Water Company

0.39

3.0%

639

CNL

Cleco Power LLC

0.50

3.0%

2,019

UGI

UGI Corporation

0.36

3.0%

3,691

WTR

Aqua America, Inc.

0.21

2.7%

3,151

SJI

South Jersey Industries, Inc.

0.29

2.6%

1,703

NTT

Nippon Telegraph and Telephone Corporation

0.30

2.5%

66,554

SHEN

Shenandoah Telecommunications Co

0.37

1.9%

408

Data is provided by Zacks.com services except for FTE which is from Yahoo!Finance as of March 4, 2011.

The next step of the analysis is to download all 33 price histories to disaggregate the beta into the two components: correlation coefficient and volatility ratio. The volatility ratio is simply the ratio of the stocks volatility to that of a selected market index, SPDR S&P 500 Trust ETF (NYSEARCA:SPY) for this analysis. The interesting follow up analysis would be to see if these stocks could also reduce volatility in a different index – perhaps a balanced fund that carries both equities and bonds.

The implied beta calculation is based upon the correlation coefficient over the last 4 years. It should be noted that both AT and AWK had insufficient price histories. I also included the Utilities Select Sector SPDR (NYSEARCA:XLU) for comparison.

Calculated Betas

Ticker

Zacks.com Beta

Calculated Correlation Coefficient

Calculated Volatility

Volatility Ratio

Implied Beta

SPY

1.00

100%

5.6%

100%

1.00

XLU

NA

71%

4.6%

83%

0.59

XEL

0.44

51%

4.7%

83%

0.42

PCG

0.33

40%

4.4%

79%

0.31

FTE

0.71

53%

7.8%

139%

0.74

PPL

0.47

44%

6.2%

110%

0.49

DUK

0.44

59%

4.1%

73%

0.43

PGN

0.39

56%

3.9%

70%

0.39

VVC

0.41

40%

5.8%

104%

0.42

ED

0.29

37%

4.5%

81%

0.30

SO

0.35

45%

4.2%

74%

0.34

AGL

0.45

53%

5.0%

89%

0.48

CHG

0.40

32%

6.7%

120%

0.38

LG

0.08

6%

5.3%

95%

0.05

CHT

0.38

40%

6.1%

109%

0.44

WGL

0.25

27%

5.0%

89%

0.24

NST

0.32

40%

4.5%

80%

0.32

PNY

0.25

21%

5.9%

106%

0.23

MGEE

0.28

33%

4.5%

80%

0.27

NWN

0.31

32%

5.3%

95%

0.30

GAS

0.50

40%

7.3%

131%

0.52

WEC

0.35

47%

4.3%

78%

0.36

CWT

0.30

25%

5.9%

106%

0.26

NJR

0.19

26%

4.5%

81%

0.21

CPK

0.42

42%

5.9%

106%

0.44

IDA

0.44

45%

5.5%

98%

0.44

AWR

0.39

30%

6.5%

116%

0.35

CNL

0.50

54%

5.4%

96%

0.51

UGI

0.36

48%

4.1%

73%

0.35

WTR

0.21

18%

6.6%

118%

0.21

SJI

0.29

35%

4.6%

82%

0.29

NTT

0.30

28%

6.8%

122%

0.34

SHEN

0.37

17%

11.7%

209%

0.36

Data is provided by Zacks.com for all betas except for XLU and SPY which are from Yahoo!Finance. Volatility and correlations are calculated from Yahoo!Finance price histories using split and dividend adjusted monthly prices.

The first observation is that XLU has a much higher correlation than any of the other utilities. Also, all my calculations for betas aligned pretty closely with Zacks.com, hence implying that most likely my volatilities and correlation coefficients were correct. Here is the conclusion table showing the volatility reduction and yield increase from shifting from a 100% SPY portfolio to a 75% SPY and 25% in each of the following stocks.

Portfolio Impact of Utility Stocks

Ticker

Dividend Yield

Volatility

Correlation Coefficient

New Portfolio Volatility

New Dividend Yield

Incremental Volatility

Incremental Dividend Yield

SPY

1.7%

5.6%

100%

5.6%

1.7%

0.0%

0.0%

XLU

4.0%

4.6%

71%

5.1%

2.3%

-0.5%

0.6%

XEL

4.2%

4.7%

51%

4.9%

2.3%

-0.7%

0.6%

PCG

3.9%

4.4%

40%

4.7%

2.3%

-0.9%

0.6%

FTE

5.9%

7.8%

53%

5.5%

2.8%

-0.1%

1.1%

PPL

5.4%

6.2%

44%

5.1%

2.6%

-0.5%

0.9%

DUK

5.4%

4.1%

59%

4.9%

2.6%

-0.7%

0.9%

PGN

5.4%

3.9%

56%

4.8%

2.6%

-0.8%

0.9%

VVC

5.1%

5.8%

40%

5.0%

2.5%

-0.6%

0.8%

ED

4.8%

4.5%

37%

4.7%

2.5%

-0.9%

0.8%

SO

4.8%

4.2%

45%

4.8%

2.5%

-0.8%

0.8%

AGL

4.6%

5.0%

53%

5.0%

2.4%

-0.6%

0.7%

CHG

4.4%

6.7%

32%

5.0%

2.4%

-0.6%

0.7%

LG

4.2%

5.3%

6%

4.5%

2.3%

-1.1%

0.6%

CHT

4.2%

6.1%

40%

5.0%

2.3%

-0.6%

0.6%

WGL

3.9%

5.0%

27%

4.7%

2.3%

-0.9%

0.6%

NST

3.8%

4.5%

40%

4.8%

2.2%

-0.8%

0.5%

PNY

3.7%

5.9%

21%

4.7%

2.2%

-0.9%

0.5%

MGEE

3.7%

4.5%

33%

4.7%

2.2%

-0.9%

0.5%

NWN

3.6%

5.3%

32%

4.8%

2.2%

-0.8%

0.5%

GAS

3.5%

7.3%

40%

5.2%

2.1%

-0.4%

0.4%

WEC

3.5%

4.3%

47%

4.8%

2.1%

-0.8%

0.4%

CWT

3.4%

5.9%

25%

4.8%

2.1%

-0.8%

0.4%

NJR

3.4%

4.5%

26%

4.6%

2.1%

-1.0%

0.4%

CPK

3.2%

5.9%

42%

5.0%

2.1%

-0.6%

0.4%

IDA

3.2%

5.5%

45%

5.0%

2.1%

-0.6%

0.4%

AWR

3.0%

6.5%

30%

4.9%

2.0%

-0.7%

0.3%

CNL

3.0%

5.4%

54%

5.0%

2.0%

-0.6%

0.3%

UGI

3.0%

4.1%

48%

4.8%

2.0%

-0.8%

0.3%

WTR

2.7%

6.6%

18%

4.8%

2.0%

-0.8%

0.3%

SJI

2.6%

4.6%

35%

4.7%

1.9%

-0.9%

0.2%

NTT

2.5%

6.8%

28%

5.0%

1.9%

-0.6%

0.2%

SHEN

1.9%

11.7%

17%

5.5%

1.8%

-0.1%

0.1%

Data is provided by Zacks.com for dividend yields and other fields are calculated.

Issues

There are several other considerations that must be considered that span from other risk aspects to overall goals of the investor to tax considerations. The following issues should be reviewed, but are not exhaustive.

  1. Risk – This approach does not consider other risk aspects of these securities. Additional fundamental analysis should be completed to determine if there is any risk of a decline in the overall business due to a weakening business model, management issues, or regulatory risk among others. In examining bond options, it would be important to consider inflation issues and the interest rate risk.
  2. Investment approach – This strategy makes the assumption that the investor has some portion of their portfolio in equities. It is possible to pursue current income through bond funds and other types of investments.
  3. Tax considerations – Qualified dividends are currently taxed at a different rate from interest income. Yields should be calculated on an after tax basis. Foreign stocks may have other tax implications.
  4. Data – The data used for this analysis came from both Zacks.com and Yahoo!Finance. One key issue is the details of the method of calculating betas, correlation coefficients, and volatility since it can vary widely based on time frame. Furthermore, it varies based on whether you look at monthly price histories or daily price histories. SPY and SPDR Dow Jones Industrial Average (NYSEARCA:DIA) have a very low correlation when looking at daily returns, but a very high correlation on a monthly basis.
  5. Capital risk – This is one additional risk that should be highlighted. This analysis focused on looking at stocks based on current dividend yield and price histories. It does not consider any fundamental valuation aspects of these companies that could result in a loss of capital due to overvaluation or other risks.

Conclusions

The addition of select utility stocks to an equity portfolio can provide significant diversification benefits as well as boosting dividend yield of the portfolio. While this is common knowledge, some utilities offer substantially better volatility reduction and yield increases than others. The top utilities for diversifying against SPY would be PGN, DUK, and ED which provided the greatest improvement in Dividend Yield/Volatility. The following stocks provided the worst improvement (but still improvement): SHEN, NTT, and SJI.

Furthermore, selecting individual utility stocks can provide much better diversification benefits than simply using XLU which had a higher correlation to SPY than any individual stock. Furthermore, several individual stocks had low correlations to XLU.

Correlations to XLU and SPY

Ticker

Name

Correlation to XLU

Correlation to SPY

Utility Type

XLU

Utilities Select Sector SPDR

100%

71%

Electric

SHEN

Shenandoah Telecommunications Co

15%

17%

Telecommunications

PNY

Piedmont Natural Gas Company, Inc.

24%

21%

Gas

LG

Laclede Group, Inc.

24%

6%

Gas

CWT

California Water Service Group Holding

25%

25%

Water

CPK

Chesapeake Utilities Corporation

26%

42%

Gas

NTT

Nippon Telegraph and Telephone Corporation

30%

28%

Telecommunications

CHT

Chunghwa Telecom Co Ltd

35%

40%

Telecommunications

CHG

CH Energy Group, Inc.

36%

32%

Electric

MGEE

MGE Energy Inc.

39%

33%

Electric

WTR

Aqua America, Inc.

40%

18%

Water

NWN

Northwest Natural Gas Company

44%

32%

Gas

AWR

American States Water Company

45%

30%

Water

FTE

France Telecom

45%

53%

Telecommunications

GAS

Nicor Inc.

48%

40%

Gas

ED

Consolidated Edison Company of New York, Inc.

48%

37%

Electric

AGL

AGL Resources, Inc.

50%

53%

Gas

WGL

WGL Holdings Inc

51%

27%

Gas

NJR

NewJersey Resources Corporation

52%

26%

Gas

SJI

South Jersey Industries, Inc.

59%

35%

Gas

SO

Southern Company (The)

64%

45%

Electric

PCG

Pacific Gas & Electric Co.

64%

40%

Electric

NST

NSTAR

65%

40%

Electric

UGI

UGI Corporation

68%

48%

Electric

CNL

Cleco Power LLC

69%

54%

Electric

DUK

Duke Energy Corporation

70%

59%

Electric

PPL

PPL Corporation

70%

44%

Electric

IDA

IDACORP, Inc.

71%

45%

Electric

XEL

Xcel Energy Inc.

71%

51%

Electric

WEC

Wisconsin Energy Corporation

72%

47%

Electric

VVC

Vectren Corporation

74%

40%

Electric

PGN

Progress Energy Inc.

76%

56%

Electric

Some electric utilities are also engaged in gas and other businesses.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.

Source: 32 Yield-Boosting, Volatility-Reducing Utility Dividend Stocks