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. (MCD), Exxon Mobil Corp. (XOM) and Wal-Mart Stores, Inc. (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 (CPK), with a market capitalization of $367 million, to Nippon Telegraph and Telephone Corporation (NTT), with a market capitalization around $66 billion.
The list also excluded interesting companies that might be worth considering including France Telecom (FTE), which has a slightly higher beta. Since my previous article noted that equal betas do not necessarily imply equal reductions in portfolio volatility, I’ve included FTE for comparison.
Here is a list of all 33 stocks (FTE included) ranked by dividend yield:
Ticker | Name | Beta | Dividend Yield 3/3/2011 | Market Cap 3/3/2011 ($millions) |
Atlantic Power Corporation | 0.08 | 7.0% | 1,036 | |
France Telecom | 0.71 | 5.9% | 59,410 | |
PPL Corporation | 0.47 | 5.4% | 12,459 | |
Duke Energy Corporation | 0.44 | 5.4% | 24,031 | |
PGN | Progress Energy Inc. | 0.39 | 5.4% | 13,491 |
Vectren Corporation | 0.41 | 5.1% | 2,212 | |
Consolidated Edison Company of New York, Inc. | 0.29 | 4.8% | 14,572 | |
Southern Company (The) | 0.35 | 4.8% | 31,741 | |
AGL | AGL Resources, Inc. | 0.45 | 4.6% | 3,048 |
CH Energy Group, Inc. | 0.40 | 4.4% | 776 | |
Xcel Energy Inc. | 0.44 | 4.2% | 11,551 | |
Laclede Group, Inc. | 0.08 | 4.2% | 872 | |
Chunghwa Telecom Co Ltd | 0.38 | 4.2% | 23,234 | |
Pacific Gas & Electric Co. | 0.33 | 3.9% | 18,331 | |
WGL Holdings Inc | 0.25 | 3.9% | 1,970 | |
NSTAR | 0.32 | 3.8% | 4,683 | |
Piedmont Natural Gas Company, Inc. | 0.25 | 3.7% | 2,184 | |
MGE Energy Inc. | 0.28 | 3.7% | 945 | |
Northwest Natural Gas Company | 0.31 | 3.6% | 1,288 | |
Nicor Inc. | 0.50 | 3.5% | 2,434 | |
Wisconsin Energy Corporation | 0.35 | 3.5% | 6,996 | |
California Water Service Group Holding | 0.30 | 3.4% | 747 | |
NewJersey Resources Corporation | 0.19 | 3.4% | 1,770 | |
Chesapeake Utilities Corporation | 0.42 | 3.2% | 387 | |
IDACORP, Inc. | 0.44 | 3.2% | 1,874 | |
American Water Works | 0.35 | 3.1% | 4,941 | |
American States Water Company | 0.39 | 3.0% | 639 | |
Cleco Power LLC | 0.50 | 3.0% | 2,019 | |
UGI Corporation | 0.36 | 3.0% | 3,691 | |
Aqua America, Inc. | 0.21 | 2.7% | 3,151 | |
South Jersey Industries, Inc. | 0.29 | 2.6% | 1,703 | |
Nippon Telegraph and Telephone Corporation | 0.30 | 2.5% | 66,554 | |
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 (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 (XLU) for comparison.
Ticker | Zacks.com Beta | Calculated Correlation Coefficient | Calculated Volatility | Volatility Ratio | Implied Beta |
1.00 | 100% | 5.6% | 100% | 1.00 | |
NA | 71% | 4.6% | 83% | 0.59 | |
0.44 | 51% | 4.7% | 83% | 0.42 | |
0.33 | 40% | 4.4% | 79% | 0.31 | |
0.71 | 53% | 7.8% | 139% | 0.74 | |
0.47 | 44% | 6.2% | 110% | 0.49 | |
0.44 | 59% | 4.1% | 73% | 0.43 | |
PGN | 0.39 | 56% | 3.9% | 70% | 0.39 |
0.41 | 40% | 5.8% | 104% | 0.42 | |
0.29 | 37% | 4.5% | 81% | 0.30 | |
0.35 | 45% | 4.2% | 74% | 0.34 | |
AGL | 0.45 | 53% | 5.0% | 89% | 0.48 |
0.40 | 32% | 6.7% | 120% | 0.38 | |
0.08 | 6% | 5.3% | 95% | 0.05 | |
0.38 | 40% | 6.1% | 109% | 0.44 | |
0.25 | 27% | 5.0% | 89% | 0.24 | |
0.32 | 40% | 4.5% | 80% | 0.32 | |
0.25 | 21% | 5.9% | 106% | 0.23 | |
0.28 | 33% | 4.5% | 80% | 0.27 | |
0.31 | 32% | 5.3% | 95% | 0.30 | |
0.50 | 40% | 7.3% | 131% | 0.52 | |
0.35 | 47% | 4.3% | 78% | 0.36 | |
0.30 | 25% | 5.9% | 106% | 0.26 | |
0.19 | 26% | 4.5% | 81% | 0.21 | |
0.42 | 42% | 5.9% | 106% | 0.44 | |
0.44 | 45% | 5.5% | 98% | 0.44 | |
0.39 | 30% | 6.5% | 116% | 0.35 | |
0.50 | 54% | 5.4% | 96% | 0.51 | |
0.36 | 48% | 4.1% | 73% | 0.35 | |
0.21 | 18% | 6.6% | 118% | 0.21 | |
0.29 | 35% | 4.6% | 82% | 0.29 | |
0.30 | 28% | 6.8% | 122% | 0.34 | |
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 |
1.7% | 5.6% | 100% | 5.6% | 1.7% | 0.0% | 0.0% | |
4.0% | 4.6% | 71% | 5.1% | 2.3% | -0.5% | 0.6% | |
4.2% | 4.7% | 51% | 4.9% | 2.3% | -0.7% | 0.6% | |
3.9% | 4.4% | 40% | 4.7% | 2.3% | -0.9% | 0.6% | |
5.9% | 7.8% | 53% | 5.5% | 2.8% | -0.1% | 1.1% | |
5.4% | 6.2% | 44% | 5.1% | 2.6% | -0.5% | 0.9% | |
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% |
5.1% | 5.8% | 40% | 5.0% | 2.5% | -0.6% | 0.8% | |
4.8% | 4.5% | 37% | 4.7% | 2.5% | -0.9% | 0.8% | |
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% |
4.4% | 6.7% | 32% | 5.0% | 2.4% | -0.6% | 0.7% | |
4.2% | 5.3% | 6% | 4.5% | 2.3% | -1.1% | 0.6% | |
4.2% | 6.1% | 40% | 5.0% | 2.3% | -0.6% | 0.6% | |
3.9% | 5.0% | 27% | 4.7% | 2.3% | -0.9% | 0.6% | |
3.8% | 4.5% | 40% | 4.8% | 2.2% | -0.8% | 0.5% | |
3.7% | 5.9% | 21% | 4.7% | 2.2% | -0.9% | 0.5% | |
3.7% | 4.5% | 33% | 4.7% | 2.2% | -0.9% | 0.5% | |
3.6% | 5.3% | 32% | 4.8% | 2.2% | -0.8% | 0.5% | |
3.5% | 7.3% | 40% | 5.2% | 2.1% | -0.4% | 0.4% | |
3.5% | 4.3% | 47% | 4.8% | 2.1% | -0.8% | 0.4% | |
3.4% | 5.9% | 25% | 4.8% | 2.1% | -0.8% | 0.4% | |
3.4% | 4.5% | 26% | 4.6% | 2.1% | -1.0% | 0.4% | |
3.2% | 5.9% | 42% | 5.0% | 2.1% | -0.6% | 0.4% | |
3.2% | 5.5% | 45% | 5.0% | 2.1% | -0.6% | 0.4% | |
3.0% | 6.5% | 30% | 4.9% | 2.0% | -0.7% | 0.3% | |
3.0% | 5.4% | 54% | 5.0% | 2.0% | -0.6% | 0.3% | |
3.0% | 4.1% | 48% | 4.8% | 2.0% | -0.8% | 0.3% | |
2.7% | 6.6% | 18% | 4.8% | 2.0% | -0.8% | 0.3% | |
2.6% | 4.6% | 35% | 4.7% | 1.9% | -0.9% | 0.2% | |
2.5% | 6.8% | 28% | 5.0% | 1.9% | -0.6% | 0.2% | |
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.
- 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.
- 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.
- 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.
- 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 (DIA) have a very low correlation when looking at daily returns, but a very high correlation on a monthly basis.
- 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.
Ticker | Name | Correlation to XLU | Correlation to SPY | Utility Type |
Utilities Select Sector SPDR | 100% | 71% | Electric | |
Shenandoah Telecommunications Co | 15% | 17% | Telecommunications | |
Piedmont Natural Gas Company, Inc. | 24% | 21% | Gas | |
Laclede Group, Inc. | 24% | 6% | Gas | |
California Water Service Group Holding | 25% | 25% | Water | |
Chesapeake Utilities Corporation | 26% | 42% | Gas | |
Nippon Telegraph and Telephone Corporation | 30% | 28% | Telecommunications | |
Chunghwa Telecom Co Ltd | 35% | 40% | Telecommunications | |
CH Energy Group, Inc. | 36% | 32% | Electric | |
MGE Energy Inc. | 39% | 33% | Electric | |
Aqua America, Inc. | 40% | 18% | Water | |
Northwest Natural Gas Company | 44% | 32% | Gas | |
American States Water Company | 45% | 30% | Water | |
France Telecom | 45% | 53% | Telecommunications | |
Nicor Inc. | 48% | 40% | Gas | |
Consolidated Edison Company of New York, Inc. | 48% | 37% | Electric | |
AGL | AGL Resources, Inc. | 50% | 53% | Gas |
WGL Holdings Inc | 51% | 27% | Gas | |
NewJersey Resources Corporation | 52% | 26% | Gas | |
South Jersey Industries, Inc. | 59% | 35% | Gas | |
Southern Company (The) | 64% | 45% | Electric | |
Pacific Gas & Electric Co. | 64% | 40% | Electric | |
NSTAR | 65% | 40% | Electric | |
UGI Corporation | 68% | 48% | Electric | |
Cleco Power LLC | 69% | 54% | Electric | |
Duke Energy Corporation | 70% | 59% | Electric | |
PPL Corporation | 70% | 44% | Electric | |
IDACORP, Inc. | 71% | 45% | Electric | |
Xcel Energy Inc. | 71% | 51% | Electric | |
Wisconsin Energy Corporation | 72% | 47% | Electric | |
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.
Disclosure: I am long SPY.
