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If you're a dividend income investor who is looking to put new money to work in the utilities sector, let me offer up two UK utilities that offer the same characteristics as US Dividend Champion utility stocks, but with lower valuations and significantly higher yields:

SSE PLC (OTCPK:SSEZY) - Market Cap 20B

National Grid PLC (NYSE:NGG) - Market Cap 36B

These are large cap national utilities, although both have activities outside their home markets. They have many similar characteristics as US Dividend Champion utility stocks, but due to the lower valuation of the UK market, these two behemoths currently trade at deep discounts to their US counterparts.

P/E*

Current Yield*

S&P 500

16.17

1.98

FTSE 100

9.92

3.3

* Sources: Birinyi Associates; WSJ Market Data Group

From the table above we can see the FTSE 100 P/E is trading 38% below S&P levels, while current yields are 66% higher. SSE and National Grid, (both FTSE 100 stocks) reflect the discount available in the larger market.

For the US income investor there are 4 reasons that make these 2 UK utilities attractive at current levels:

1. Better value. Higher yield and lower valuations than offered by US Dividend Champion utilities.

2. UK dividends are paid out free of withholding tax to US investors.

3. Lowered currency risk - GBP is 6.5 % below the 40yr average GBP/USD exchange rate.

4. Both utilities are available as ADR's.

Let us first examine the valuations offered by the US Dividend Champions. A Dividend Champion is a company that has increased its dividend every year for 25 or more years.

Payout

P/E

P/Book

Dividend Growth (%)

EPS Growth(%)

Company

Symbol

Yield

Ratio(%)

[TTM]

[MRQ]

1-yr

3-yr

5-yr

10-yr

1-yr

3-yr

5-yr

American States Water

(NYSE:AWR)

3.04

43.75

14.40

1.70

5.8

3.2

3.4

2.4

34.4

14.3

10.8

Black Hills Corp.

(NYSE:BKH)

4.51

101.37

22.49

1.20

1.4

1.4

2.0

2.7

(37.7)

?

(9.4)

California Water Service

(NYSE:CWT)

3.28

64.29

19.60

1.71

3.4

1.7

1.4

1.0

(0.2)

(1.7)

6.1

Conn. Water Service

(NASDAQ:CTWS)

3.30

74.22

22.52

2.17

1.6

2.2

1.9

1.6

(5.3)

2.5

5.3

Consolidated Edison

(NYSE:ED)

4.17

67.79

16.27

1.49

0.8

0.8

0.9

0.9

2.9

1.9

3.8

Energen Corp.

(NYSE:EGN)

1.05

15.60

14.83

1.61

3.8

4.0

4.2

4.6

(11.1)

(7.1)

(0.8)

MGE Energy Inc.

(NASDAQ:MGEE)

3.49

55.65

15.95

1.87

2.0

1.9

1.8

1.3

5.6

3.5

5.0

Middlesex Water Co.

(NASDAQ:MSEX)

4.02

84.09

20.93

1.64

1.4

1.4

1.4

1.6

(11.9)

(1.9)

0.6

National Fuel Gas

(NYSE:NFG)

2.82

45.51

16.13

2.19

2.9

3.3

3.5

3.6

16.5

(0.8)

7.6

Northwest Natural Gas

(NYSE:NWN)

3.89

73.86

18.99

1.78

4.2

4.8

4.7

3.5

(12.4)

(3.0)

0.8

Piedmont Natural Gas

(NYSE:PNY)

3.58

73.89

20.64

2.36

3.6

3.7

3.9

4.2

(19.7)

1.7

4.3

Questar Corp.

(NYSE:STR)

3.38

56.03

16.57

3.30

14.8

7.9

5.9

5.8

7.6

5.9

(14.4)

SJW Corp.

(NYSE:SJW)

2.97

63.96

21.52

1.68

1.5

2.3

4.0

4.9

(14.7)

(1.2)

(11.8)

Vectren Corp.

(NYSE:VVC)

4.79

80.92

16.89

1.64

1.5

1.9

2.4

3.0

5.3

1.8

3.9

WGL Holdings Inc.

(NYSE:WGL)

3.80

77.89

20.52

1.69

2.7

3.0

2.7

2.1

5.4

(0.8)

3.3

Average

-

3.47

65.25

18.55

1.87

3.43

2.91

2.94

2.87

-2.34

1.10

1.00

* source:www.dripinvesting.org

UK Utilities*

Payout

P/E

P/Book

Dividend Growth (%)

EPS Growth(%)

Company

Symbol

Yield

Ratio(%)

(MRQ)

1-yr

3-yr

5-yr

10-yr

1-yr

3-yr

5-yr

National Grid PLC

(NGG)

5.91

60.07

10.44

2.74

(5.5)

3.3

6.9

141.0

30.1

2.0

8.6

SSE PLC

(OTCPK:SSEZY)

5.84

71.59

12.21

3.39

7.1

7.4

10.0

150.0

21.1

17.1

17.3

Average

5.88

65.83

11.33

3.07

0.82

5.36

8.45

145.50

25.59

9.52

12.97

*Source: Reuters

Strict like for like dividend history comparisons are not possible. UK utilities have not existed as private sector companies for 25 years; UK utility companies having grown out of the old state owned monopolies. National Grid was floated on the UK market in 1995, SSE was formed in 1998 following the merger of Scottish Hydro Electric and Southern Electric. Both SSE and National Grid have increased their dividends each year since 1999, with NGG raising their dividend 8% annually on average for the last seven years. I should point out NGG's payout per share was reduced by 5.5% last year due to the 2010 rights issue. The company went to the market to raise $4.6b to fund a 5 year investment to upgrade its UK infrastructure.

Comparison

Payout

P/E

P/Book

Dividend Growth (%)

EPS Growth(%)

Yield

Ratio(%)

[MRQ]

1-yr

3-yr

5-yr

1-yr

3-yr

5-yr

US Utilities

3.47

65.25

18.55

1.87

3.43

2.91

2.94

-2.34

1.10

1.00

UK Utilities

5.88

65.83

11.33

3.07

0.82

5.36

145.5

25.59

9.52

12.97

Differential %

69.22

0.88

-38.95

64.02

-318

84.1

4848

1193.28

767.25

1190.48

Conclusion

This article is only intended to bring these two high yield opportunities to US investors' attention. Investors must do their own due diligence. I understand statistically it is easy to skew 2 values against 15, unfortunately the UK doesn't have 15 utilities for direct comparison. Finally, to underline the long term value of the higher current yield offered by the UK utilities, I would like to illustrate how important purchase price and current yield are to future performance:

For argument's sake assume we invest equal dollar amounts between the average yield of the UK utilities (5.87%), and the US Utility Dividend Champs (3.47%). Let's also assume that the US utilities increased their dividends by 5% per year, while the UK utilities do not increase, instead maintaining the same payout level indefinitely. It would take 10 years for the US utilities dividend to catch up, and the UK utilities would have also paid out 21% more in hard cold cash over the 10 year period. Cash that could have been reinvested, pushing the differential even further in the UK utilities favor. If the UK utilities had instead increased their dividend by a modest 2.5% annually, i.e. half the dividend growth of the US utilities, it would then take 19 years to catch up, and they would generate 33% more cash. So, as you can see start yield, or your yield on cost is crucial to long term success in dividend income investing, and its significance is quite often overlooked. Of course high yield by itself is meaningless if it is not sustainable. These two UK utilities in my view currently offer the best of both worlds - high current yields and robust earnings growth.

Source: 2 Utilities To Beat 15 Dividend Champions