Don't Be Afraid Of Utility Stocks

Jan. 07, 2014 3:46 PM ETD, DUK, EIX, EXC, MGEE, NFG, PCG, PNY, SO, STR-OLD, WTRG, XLU23 Comments
George Fisher profile picture
George Fisher

Do not be afraid to tiptoe into the utility sector. While the "conventional" wisdom may be to shy away from utilities during times of rising interest rates, and we are definitely in the up-cycle for future rate movements, there are opportunities for investors to become a bit more defensive in the sector.

Offsetting the usual interest rate risk for income stocks such as utilities is increased contribution from dividend growth. The usual equation is that lower asset prices will increase current yield, especially with fixed income assets. However, utilities stock income is not like most bond "fixed income" as it has the potential to increase over time - and increase it does.

What drives dividend growth? Either a higher payout ratio or underlying earnings growth. One of the best fundamental ratios for analyzing management effectiveness in the utility sector is to review return on invested capital ROIC. ROIC is a better matrix than return on equity as it incorporates all capital employed by management, both equity and debt. My goal for the sector is a 5% or higher ROIC, with the higher the better.

A combination of high dividend growth driven by high ROIC should separate better performing management teams. The combination could uncover management teams that not only generate above average returns for shareholders but also gives these rewards back to shareholders.

A review of the exceptional list offered by SA contributor David Fish of Dividend Champions, or those utilities that have increased dividends annually for the past 25 years, revealed some interesting companies that offer both above average ROIC and sustainable dividend growth.

The top five Dividend Champions in the utility sector, by ROIC, are: American States Water (AWR), MGE Energy (MGEE), National Fuel Gas (NFG), Questar Corp. (STR) and Piedmont

This article was written by

George Fisher profile picture
I am the author of Guiding Mast Investments monthly newsletter, focused on timely dividend paying stocks. Our mission at Guiding Mast Investments is to help investors keep a steady pace of wealth accumulation as they navigate through their financial voyage.  I have been a Registered Investment Advisor, financial author, and entrepreneur. I bring a variety of expertise to my clients, from personal investment planning and management to stock market analysis skills. I am the creator of the late 1990s investment newsletter Power Investing with DRIPs focused on timely selections of dividend paying stocks. I have also published two books through McGraw Hill, All About DRIPs and DSPs (2001), and The StreetSmart Guide to Overlooked Stocks (2002). My work experience covers a variety of fields.Prior to being a RIA, I spent 15 years as a corporate manager at Georgia-Pacific Corp before venturing out on my own, operating several businesses from manufacturing to export marketing management. President Ronald Reagan appointed me to the National Advisory Council overseeing the Small Business Administration from 1988 to 1991. Now comes the obligatory disclaimers: The opinions and any recommendations expressed in this commentary are those of the author . None of the information or opinions expressed in this article constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this commentary constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. The information contained in this report does not purport to be a complete description of the securities market, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Expressions of opinion are as of this date and subject to change without notice. Either Mr. Fisher or his employer, if any, may hold or control long or short positions in the securities or instruments mentioned.

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