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Dividend growth investing, oil & gas, utilities
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New Year's day is just around the corner and the business cycle is just about finished for this time around. Since utilities are the last sector to prosper during the business cycle, I decided to focus on them in preparation for their coming correction in 2012. Many utilities, such as Dominion Resources (D) (+29% this year), Consolidated Edison (ED) (+24%), and Southern Company (SO) (+19.46%) are peaking now as is the utility index ETF XLU (+15.72%). Meanwhile, the S&P 500-- as portrayed by the SPY ETF-- is flat for the year.

This week I have selected 3 dividend growth stocks in the utilities sector. This sector has done quite well from a capital appreciation standpoint in 2011, and is getting ahead of itself. I have had trouble finding stocks with strong balance sheets with yields above 4% in a sector that usually is known for good yields. Thethe energy industry is also trending into natural gas production, and there is talk of powering many utilities with natural gas in preference to coal for pollution reasons. With the new technology of “fracking” as a means of extracting shale gas by horizontal drilling and water injection, the price of this resource has fallen appreciably. Companies like D own natural gas terminals such as Cove Point, where shipments of liquid natural gas can be received-- and now with upgrade-- dispatched to other nations, due to our surplus. This development in the natural gas part of the business should provide a new stream of income in coming years.

Avista Corporation (AVA)- Avista Corporation, an energy company, engages in the generation, transmission, and distribution of energy and other energy-related businesses in the United States and Canada. This Dividend Challenger has 9 years of dividend increases. The current yield is 4.2%. The 5-year annual average dividend growth rate is 48.2%. The current p/e is 14.6.

The projected earnings per share growth for next year is .57%, while for the next 5 years it is 7.4%. The dividend growth rate has slowed this year to 10%, with a 61% payout ratio. This is a small cap stock with a cyclical price pattern averaging $22 with a high of $26 ( July 2011) and a low of $13.32 (March 2009). It has risen from $21 to $26 this year.

Unisource Energy Corporation (UNS)-- UniSource Energy Corporation engages in the electric generation and energy delivery businesses. The company's TEP segment generates, transmits, and distributes electricity to approximately 403,000 retail electric customers, including residential, commercial, industrial, and public sector customers in southeastern Arizona. This Dividend Contender has 12 years of increasing dividends. The current yield is 4.49%. The 5-year annual average dividend growth rate is 14.86%.

It should be noted that the dividend increase this year was 7.69%. The current p/e is 13.4. The projected earnings per share growth for next year is -1.82% and for the next 5 years is 19.8%. This is a small cap stock with a volatile price chart. It has averaged $32 with highs around $40 (2007) and low of $21.66 (2008) over the last 5 years. It has risen from $32 to $38 this year.

Dominion Resources (D)-- Dominion Resources, Inc., together with its subsidiaries, engages in producing and transporting energy in the United States. It operates in three segments: DVP, Dominion Generation, and Dominion Energy. This Dividend Challenger has 8 years of increasing dividends. The current yield is 3.73%. [It should be noted that the yield does not meet my 4% minimum yield for strategic investment. I would wait until the dividend is increased or the price falls to the 4% yield point for adding shares.] The 5-year annual average dividend growth rate is 7.1%. The current p/e is 16.3. The projected earnings per share growth for next year is 4.47% and 6.1% for the next 5 years.

A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks, when compared to SPY (S&P500 Index ETF).

Click to enlarge

We will now look at the dividend income stream for these three stocks. With equal positions of $10k each purchased 1 year ago, these stocks produced a quarterly income stream as shown in the following table:

Stock

Quarterly Dividend Rate

Number of Shares

Quarterly Income

AVA

$.25

467.94

$116.98

UNS

$.39

277.39

$108.18

D

$.46

237.92

$108.97

In order to investigate the growth of the portfolio, due to dividend reinvestment, I will once again create a spreadsheet for only the last year (December 2010-December 2011).

Stock Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur Total Value
Totals 489.99 $512.14 22.05
AVA 08/23/11 $0.28 484.44 $133.22 $24.02 5.55 $11,769.59
05/24/11 $0.28 479.05 $131.74 $24.42 5.39 $11,830.14
02/16/11 $0.28 473.41 $130.19 $23.10 5.64 $11,066.06
11/30/10 $0.25 467.94 $116.99 $21.37 5.47 $10,116.86
Totals 290.06 $465.50 12.67
UNS 08/16/11 $0.42 286.76 $120.44 $36.47 3.30 $10,578.57
05/17/11 $0.42 283.59 $119.11 $37.63 3.17 $10,790.77
03/09/11 $0.42 280.39 $117.76 $36.76 3.20 $10,424.93
12/14/10 $0.39 277.39 $108.18 $36.05 3.00 $10,108.09
Totals 248.14 $468.55 10.22
D 08/24/11 $0.49 245.70 $121.13 $49.58 2.44 $12,302.97
05/25/11 $0.49 243.16 $119.88 $47.18 2.54 $11,592.16
03/02/11 $0.49 240.51 $118.57 $44.79 2.65 $10,891.13
11/24/10 $0.46 237.92 $108.97 $42.03 2.59 $10,108.74

At this point, I will add a table to illustrate the growth of dividends received and the steadily growing income over time.

Stock

Q1

Q2

Q3

Q4

AVA

$116.99

$130.19

$131.74

$133.22

UNS

$108.18

$117.76

$119.11

$120.44

D

$108.97

$118.57

$119.88

$121.13

Totals

$334.14

$366.43

$370.73

$374.79

In addition, I will illustrate the total value of this portfolio by quarter in the following graph:

It can be seen from the table that the income for the year was $1446.09. On an investment of $30k, this was 4.8% yield. It can be seen from the Total Portfolio chart that the ending portfolio value was $34651.13. This computed out to a capital gain of $4651.13 or 15.5%.

When compared to SPY, the total return with dividends reinvested was 15.5% vs 0% for SPY for the year. Although the secular bear market did not provide much in the way of capital gain for SPY, the utilities sector performed marvelously. As can be seen from the price chart for the 5 year period, however, all of these stocks and the index are cyclical, with 50% drops for some of them at the bottom of the cycle. Only D was positive at the end of the 5 year period.

Conclusion:

With the coming cyclical downturn in 2013 for the United States and the global recession, led by Europe in 2012, dividend growth stocks with long histories of raising dividends and capital preservation are critical values. Utilities provide some protection from the downdraft, due to inelasticity of demand. With environmental concerns driving a shift to natural gas for boiler fuel, D and UNS should once again be spared some of the pain when the market bottoms out. UNS provides gas and gas powered electric generation from it's Black Mountain Generating Station in Northern Arizona. AVA has some exposure to natural gas retail distribution in Washington State, Idaho and parts of Oregon.

The Utility Industry is consolidating, and many of the smaller companies are merging to form larger regional utilities. D is one of the leaders in this consolidation. I will continue to drip D and add to my position when the price falls below my 4% yield maximum price. It is critical that each investor does their own due diligence before making any investment.

Source: 3 Dividend Paying Utility Stocks For 2012