Electric utilities are defensive investments that play out very well during the volatile times. They offer a comparably higher yield than alternative investment vehicles and trade at a lower beta (a measure of volatility) than the broader market. Their yields are especially attractive now that the yield on the 10-year Treasury bond has sunk below 1.56% and the dividend yield on the broad Russell 2000 equity index has been hovering around the same rate.
There are plenty of electric utility stocks with high yields. However, investors should look beyond the high yield and focus on the high-quality issues that promise to generate high total returns in the future. The S&P 500 High Quality Rankings Index, which identifies stocks of companies with long-term growth and stability of earnings and dividends, singles out five high-quality electric utility stocks that can comprise a winning dividend portfolio. This index outperformed S&P 500 Total Return Index by more than 4 percentage points annually over the last 3 years (click here for details about the S&P 500 High Quality Rankings Index). Here is a closer look at five high-quality electric utility dividend payers in this index.
Entergy Corporation (ETR) provides electric power to some 2.8 million customers in Arkansas, Mississippi, Texas, and Louisiana, including the City of New Orleans. The company has a market cap of $13 billion. The stock yields 4.6% on a payout ratio of 62%. The company has seen its EPS grow at an average rate of 7.1% per year over the past five years. Over the same period, its dividend increased 9% per year. Analysts forecast a somewhat lower EPS growth at 1.7% per year for the next five years. The stock has a free cash flow yield of 5.7% and a ROE of 10.8%. On a forward P/E basis, the stock is trading at a discount to the conventional electricity industry. The stock is changing hands at $72.60 a share, up 6.3% over the past year. Among fund managers, billionaires Cliff Asness and D. E. Shaw are big fans of the stock.
NextEra Energy (NEE), a $30 billion utility, supplies electricity to 4.6 million customer accounts in Florida. It is one of the largest rate-regulated power utilities in the U.S. Its affiliated entities are the single largest U.S. generators of renewable energy from the sun and wind. The utility yields 3.4% on a payout ratio of 47%. Its EPS expanded at an average rate of 7.3% per year over the past five years and dividends grew at a rate of 8%. Analysts forecast that the company's EPS will grow at 5.7% per year for the next five years. The stock boasts ROE of 14.2%. Its forward P/E of 15.2 is slightly below the average ratio for the industry. The shares are trading at $71.10 a share, up almost 24% over the past year and close to its new 52-week high. The stock is popular with Phill Gross and Robert Atchinson at Adage Capital Management.
Wisconsin Energy Corp. (WEC) serves about 1.1 million electricity customers in Wisconsin and the Upper Peninsula of Michigan as well as some 1 million gas customers in Wisconsin. The company with $9.4 billion in market capitalization has a dividend yield of 3.0% and a payout ratio of 53%. Its EPS grew at an average rate of 10.5% per year over the past five years, while its dividend increased at a rate of 18.5%. The company is expected to boost its EPS at a rate of nearly 7% per year for the next five years. The company's ROE is 12.9%. The stock has a forward P/E of 17.9%, above the average ratio for the multi-utilities industry. The shares are changing hands at $40.91 a share, up almost 29% over the past year. Fund managers Phill Gross and Robert Atchinson as well as billionaire Cliff Asness have small stakes in the company.
Southern Company (SO) is a $42 billion electric power utility serving some 4.4 million retail customers and a number of investor-owned utilities, electric cooperatives, and municipalities in Alabama, Florida, Georgia, Mississippi, and the Carolinas. The stock is yielding 4.1% on a payout ratio of 79%. The company's EPS and dividends grew at average rates of 3.9% and 4.0% per year, respectively, over the past five years. Analysts forecast that its EPS will expand at a faster 5.4% annual rate for the next five years. The stock boasts an ROE of 12.6%. Based on its forward P/E, the stock is trading at a premium to the conventional electricity industry. The stock is changing hands at $48.42 a share, up 19% over the past year and around its new 52-week high. Among fund managers, Louis Navellier at Navellier & Associates holds the largest stake in the stock.
Dominion Resources Inc. (D) is a $31 billion electric utility providing electricity to customers in North Carolina and Virginia and natural gas to customers in Ohio and West Virginia. Its subsidiaries also operate natural gas pipelines and storage systems. It serves nearly 6 million utility and retail energy customers in 15 U.S. states. The stock is yielding 3.9% on a payout ratio of 85%. The company's EPS expanded at 2.4% per year over the past five years, while dividends grew at 7.8%. Analysts forecast that the EPS growth will average a faster 5.6% per year for the next five years. The company's ROE is 11.9%. The stock has a forward P/E of 16.5, which is above the ratio of 15.9 for the conventional electricity industry. The shares are trading at $54.97 a share, up 10.4% over the past year and close to the new 52-week high. Billionaires Jim Simons and Israel Englander are bullish about the stock. Both hiked their stakes in the company in the first quarter of 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.