In the last article in building an income portfolio I have included both telecommunications and utilities as they only comprise about 7% of the total weighting of the S&P 500 sectors. Here we find phone companies, electric & gas and water utilities. The sector weightings of all the sectors follow.
S&P 500 Sector Weights
Over the last 20 years, these two sectors, in addition to the material sector, are the only three sectors to underperform the S&P 500. Telecommunications averaged a 4.8% return with a 12 month rolling average from -58% to + 65%. Utilities returned 4.5% with a range from -40% to + 52%. The S&P 500 returned 8.1% with a range from -45% to +50%.
In our screens for our search, we have once again tried to find the highest yielding securities with the best growth rates with a history of steady dividend increases. Boring perhaps, but such tried and true methods have a proven successful history of investing. Our screen found us once again seeking yields greater than 3%, an excellent records of annual dividend increases, and a 5-year dividend growth rate greater than 4%. Rather than screening for a good dividend payout ratio we used cash flow for both sectors due to the history of these sectors paying out high ratios of earnings to shareholders.
|Company||Current Yield||Dividend Growth Rate Previous 5 Years|| Dividend as a Percent of Cash Flow |
|P/E Est. Current Year|
CenturyLink is a popular security with investors due to the high yield and long record of year to year dividend increases. AT&T and Verizon are both established companies fighting it out to be the king of wireless. Both pay attractive dividends with solid records of increasing the dividend. I lean a touch toward AT&T over Verizon as the yield is slightly better with general growth rates the same. As an investor I own all three of the companies listed with the smallest position in CenturyLink.
|Current Yield||Dividend Growth Rate Previous 5 Years||Dividend as a Percent of Cash Flow||P/E Est. Current Year|
|Nextera Energy^ (NEE)||4.0%||7%||24%||12.2|
|Southern Company* (SO)||4.7%||4%|| |
|Dominion Resources* (D)||4.0%||8%||36%||15.7|
|AGL Resources** (AGL)||4.6%||3%||33%||12.6|
|Aqua America*** (WTR)||3.0%||7%||34%||21.1|
* Electric Utilities
** Gas Distribution
This sector is divided into electric, gas, and water. Easily the more popular investments for the majority are the electrics due to the sheer number of operating companies. I screened electrics and gas down to a number and then manually went through each in search of better performance in earnings and dividends and steady growth.
Southern Company, which serves the Southeast, has the best yield at 4.7%, but the highest payout cash flow ratio at 40% and the lowest dividend growth over the previous five years. It is called best of class by several utility analysts.
Nextera Energy, formerly FPL, serves the state of Florida, and is divided between serving its electric customers with Florida Power and Light and NexEra Energy Resources, LLC, the largest generator in North America of renewable energy from wind and sun.
Dominion Resources serves the Virginia area and the company operates in three business segments: Dominion Virginia Power, Dominion Energy and Dominion Generation.
In valuing the shares of each company I find that there is little historical value in any of the three electric utilities mentioned above. The current yields on all three are close to in the lower end of historical ranges and PE's are in the upper half. An I-GARP investor would find themselves hard pressed to overweight the electric utilities. However, during the current market period, they are outperforming as a low beta hiding place. They do offer a combination of 4% yields and 5% growth for a potential 9% total return.
In the gas distribution industry UGI and AGL Resources cleared the screen with AGL offering the best yield and value. However, both are rated as hold by consensus of analyst opinions. I would rather own the electrics.
Aqua Water is the best water stock screened, but I find a 3% yield unappealing in a utility. The valuation is well above historical norms also.
My choice would be Southern Company and NextEra in the utility sector and either AT&T or Verizon in the telecommunications sector. Telecommunications offer better value than the utilities.
This is the last article in screening for income sector by sector. My next article or two will be the selection of several portfolios using different levels of yield and potential growth.