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Market Too Exciting? Check Utilities
Has the market been a little too exciting lately? Maybe it’s time to
consider something really boring like utility stocks.
Thanks to the implosions of financial players such as Fannie Mae and
Lehman Brothers, the stocks of many solid firms, including utilities, have
been sunk along with the bad guys.
Utilities: Lots to Like
Utilities aren’t nearly as susceptible to an economic slowdown as
most stocks. Further, at least as far as I know, none have problematic
holdings such as mortgages on their balance sheets. Thus, shareholders
don’t have to worry about waking up one morning to hear that their utility
is teetering towards bankruptcy.
There’s even more to like about utilities. Many pay substantial dividends.
Those payouts look especially attractive now. Here’s why.
About Dividends
Dividends, as you probably know, are regular cash payouts that you
receive for simply owning a stock. The dividend yield is the rate of
return that you receive on your investment. Similar in concept to the
interest rate on a bank account.
Your dividend yield is the dividends that you expect to receive over the
next 12-months divided by the price that you pay for the shares. For
example, your yield would be 10 percent if you paid $10 per share for a
stock paying $1 per share annually. Assuming that the dividends remain
steady, yields rise when share prices drop. That has been the case for
many utilities this year.
In fact, when I ran the screen that I’m about to describe, I found five
financially solid utilities paying dividends equating to five to six
percent yields. That’s better than you can get from a bank these days.
Plus, you might also enjoy share price appreciation when the market
stabilizes and utility stock prices return to their normal range.
About Risk
Before I go any further, I must hasten to add that investing in
dividend-paying stocks, even utilities, is riskier than a savings account.
The share price could drop over the year, wiping out your dividend
profits. Also, a company has the right to cut its dividend at any time.
That said, since utilities typically enjoy monopolies in their market
area, they rarely go out of business and their share prices usually
recover from short-term dips, such as many have recently experienced.
Further, since utilities enjoy steady and predictable cash flows, dividend
cuts are rare.
Finding High Dividend Utilities
I used Morningstar’s free stock screener to find profitable and
financially solid dividend-paying utilities. Get there from Morningstar’s
homepage (www.morningstar.com)
by selecting
Stocks, and then
Stock Screener in the Tools section. The screener is free and using it
is a snap.
Start by selecting Utilities from the Stock Sector dropdown menu. Next
we’ll take advantage of a capability unique to Morningstar’s screen. Its
grading feature relives us of the need to analyze financial statements to
pinpoint the strongest candidates.
You can select stocks based on Morningstar’s grades in three categories:
growth, profitability, and financial health. The grades range from A to F,
where A is best, C is average and F fails the test. Morningstar bases the
grades on how each stock compares to other stocks in the same sector, in
this case utilities.
Since, in these times, financial strength is priority number one, I
required A or B grades in that category. I was more lenient for Growth and
Profitability, allowing A, B, or C grades in those categories. Since
growth and share price appreciation usually go hand-in-hand, try limiting
the field to A and B stocks in the Growth category if share price
appreciation is a priority for you.
Finally, since dividends are the point of this strategy, I selected a
minimum four percent dividend yield (I would have preferred five percent,
but that choice wasn’t available). That’s it. Select Show Results to see
the list of passing stocks.
17 Candidates
When I ran the screen, 17 utilities passed the test. Morningstar’s
default Snapshot view doesn’t show dividend yields. So, select Valuation
in the View menu to see the yields. Then, click on the Dividend Yield
column title to sort the list with the highest yielding utilities at the
top.
The screen listed five utilities paying yields in the five to six percent
range. Four were U.S. utilities paying quarterly dividends. However, one,
National Grid, based in the U.K., only pays twice a year. I ruled that one
out because with semi-annual dividends, you could wait six months before
you find out that the utility has cut its payout.
The four utilities paying at least five percent yields included:
• Pinnacle West Capital (ticker symbol
PNW, dividend yield 6.0%). Electric utility serving mostly Arizona.
• NiSource (NI, 5.7%). Electric and
natural gas utility serving customers in the Midwest, Mid-Atlantic and
Northeast states.
• Consolidated Edison (ED, 5.5%). Electric
and natural as utility serving New York City and surrounding areas
(disclosure: I hold Consolidated Edison shares).
• NorthWestern (NWEC, 5.2%). Provides
electricity and natural gas to customers in Montana, South Dakota and
Nebraska.
Morningstar listed three more utilities paying dividends equating to 4.9%
yields and nine more paying between 4.1% and 4.7%.
Since dividend yields change every time the share price moves, you may see
different yield numbers when you run the screen.
Keep in mind that the screener doesn’t know about changes in the economy
or other conditions that might affect a utility’s outlook. So, consider
the utilities listed as candidates worthy of further research, not a buy
list. The more you know about your stocks, the better your results.
published 9/14/08 |
