Utilities Are Still Dependable

Faizan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the recent low-yield environment, utility stocks have remained popular among the income seeking investors due to their attractive dividend yields. Lately, however, fear of the Fed tapering quantity easing has pushed yields up, causing utility stocks to underperform against the broad market. As the Fed tapering is linked to positive economic data, I believe that monetary easing will be prolonged for a longer period of time than currently signaled by the Fed and anticipated by the markets. Therefore, high-dividend stocks will remain attractive among income investors.

The dependable
In the utility sector, I believe that Duke Energy (NYSE: DUK) is among the most consistent and reliable of companies. Duke has delivered healthy financial performance in the past and is expected to maintain its momentum in the future as well. The company offers a high dividend yield of 4.7%, making it an attractive stock for investors’ income portfolios. Duke has a rich dividend history, evident by the fact that it has paid quarterly dividends consistently over last 87 years. Dividends have been growing in line with the earnings growth. A target payout ratio of 65% to 70% has been set by Duke under its long-term plans.

Given Duke’s strong operating cash flow yield of 11.5%, I believe dividends offered by the company are safe and sustainable. Moreover, Duke holds a healthy balance sheet and has been assigned an investment-grade credit rating by various rating agencies. Fitch and S&P, for instance, have both assigned BBB+ ratings to Duke. The following chart shows the annual dividend for Duke from 2010 up till 2013.

<table> <thead> <tr><th> </th><th> <p><strong>2010</strong></p> </th><th> <p><strong>2011</strong></p> </th><th> <p><strong>2012</strong></p> </th><th> <p><strong>2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Dividend </strong></p> </td> <td> <p>$2.94</p> </td> <td> <p>$3.00</p> </td> <td> <p>$3.06</p> </td> <td> <p>$3.12*</p> </td> </tr> </tbody> </table>

Source: Duke Energy

Other utility stocks
American Electric Power
(NYSE: AEP) is another stock that I recommend for income-seeking investors. American Electric serves more than 5 million retail customers in 11 states and has a generational capacity of more than 38,000 megawatts. The company offers a safe and high dividend yield of 4.5% which is backed by its operating cash flow yield of 17%. The company has increased its quarterly dividends consistently, increasing them from $0.35 in 2004 to the current quarterly dividend of $0.49.

American Electric has a long term payout ratio of 60% to 70%. The company has been assigned a BBB credit rating by S&P. Moreover, American Electric is committed to make its balance sheet stronger; it has lowered its total debt to capitalization from 57.2% in 2009 to a current level of 55%, something that increases its financial flexibility. Furthermore, the company has increased its pension liability funding by 20% in last four years to a healthy level of 94%.

The following table shows the annual dividend for American Electric.

<table> <thead> <tr><th> </th><th> <p><strong>2010</strong></p> </th><th> <p><strong>2011</strong></p> </th><th> <p><strong>2012</strong></p> </th><th> <p><strong>2013</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Dividend </strong></p> </td> <td> <p>$1.71</p> </td> <td> <p>$1.85</p> </td> <td> <p>$1.90</p> </td> <td> <p>$1.96*</p> </td> </tr> </tbody> </table>

Source: Ycharts.com

With a dividend yield of 4.40%, Consolidated Edison (NYSE: ED) has remained eye-catching for the investors. The company operates with two regulated utilities (division), Orange & Rockland and Con Edison of New York. The company has limited commodity exposure as supply costs increase is passed on to customers. 

The company currently pays quarterly dividend of $0.615, making an annualized dividend of $2.46. A high dividend yield of 4.40% is supported by an impressive operating cash flow yield of 12% As a result, I believe that the dividends offered by the company are sustainable.

Consolidated Edison is a high quality utility company which has delivered satisfactory financial performance in the recent past. Over the past three years, the company has increased its earnings by 7%.

Foolish conclusion
All three companies discussed above offer high dividend yields that are backed by the companies' healthy cash flow yields. Furthermore, all three companies have been registering satisfactory and consistent financial performance in recent years. As a result, these stocks remain popular for income seeking investors. Despite the fact that 10-year Treasury rates are on the rise, I believe that utility stocks will continue to be an important part of income portfolios.


Faizan Chudhry has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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