"Turn On" These Utilities For Steady Income

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

It is always a good idea to include some companies in your portfolio that provide a steady stream of income. Some investors like bonds, as they tend to be less risky than stocks. However, those looking for steady investments with a bit more upside than bonds can turn to utilities. Utilities are very stable and provide steady income to investors for various reasons.

They're recession-proof

The business model of utility companies is very sound in all economic conditions. Even when times are tight, one might buy value-brand groceries, go out to eat less, or rent a movie instead of going to the theater. Nobody stops drinking water, heating their home, or using candles to read.

They are steady

Utility stocks are also dependable. While a utility is still a stock and is therefore vulnerable to a brutal bear market, utilities carry very low betas and will never be too volatile. This can cause utilities to appear boring. You will be glad for that when the markets are fluctuating, sending stocks up and down by the week (as they have been doing lately).

They pay dividends

Utility stocks can be among the biggest dividend payers out there, and some of the most consistent. Many utility companies have been increasing dividend payments on an annual basis for decades. Utility companies can be slow growers, tend to grow through acquisitions, and pay a higher percentage of earnings out as dividends. However, due to stability, utilities can make a nice foundation for income in your portfolio.

We will focus on the Big 3 of utilities for our investing needs: water, electric, and gas.

Water

Aqua America (NYSE: WTR) is a water utility that conducts business in the eastern US, Illinois, Indiana, and Texas. It has increased its dividend every year for 22 years running. It is currently paying out about 54% of its earnings as dividends while the dividend has grown at a 7.86% compound annual growth rate over the last decade. It currently yields 2.45%. While a bit low for a utility, the stock is currently trading at a premium for a utility due in part to its above-average growth.

Aqua America has also been very active in making acquisitions to grow earnings. It has made over 200 acquisitions in the last decade, and $12 million dollars in acquisitions in the first half of 2013. Due to the fragmentation, typical of the water industry, Aqua America looks to continue this strategy to grow earnings.

Looking at the company's latest annual report, you can see the strategy paying off. Operating revenues have increased 10% from last year. Operating cash flows have increased 7%. This is impressive growth for a utility, as earnings per share have increased from $0.90 in 2010, to $1.47 per share today.

Electric

Southern Company (NYSE: SO) is an electric utility that operates in the Southeast United States. It pays a dividend yielding 4.7% of current prices. Its dividend has grown at a CAGR of 3.7% over the last 10 years while being increased annually for the last 12. It pays out 86% of its earnings as dividends.

Southern Company is not in the growth stage that you see with Aqua America. However, it is a mature, income-producing company that has sector-leading operating margins and return on equity. Southern Company is also taking steps to stay with recent energy trends. It is shifting from coal-based production to natural gas and nuclear power.

Southern posted its most recent 10-Q filing in May. Its operating revenues increased from $3.6 billion to $3.9 billion from the same quarter last year. Net income decreased 78% from the same quarter last year, but this is due to projects (Kemper plant) to produce cleaner energy. Southern Company is focused on increasing its role in tomorrow's energy landscape through cleaner energy production and higher margins.

Gas

National Fuel (NYSE: NFG) is a utility located in the New York State-Pennsylvania region that operates in the utility, production, storage, and exploration of natural gas. Its dividend has increased for 43 consecutive years. It has grown its dividend at 3.5% annually over the last 10 years while consuming only 51% of its earnings and yielding 2.5% based on current stock prices.

National Fuel is a bit unique, as it operates multiple business segments instead of a sole utility provider. Its exploration and production segments account for about half of its net income. It has potential to grow its supply with 745,000 acres of shale that remains mostly untapped.

Its annual report shows a "mixed bag". Earnings have decreased from last year. This is largely due to a decrease in natural gas prices, as well as warmer weather decreasing consumption of gas in the utility sector. National Fuel is more than a utility. It is an energy company that participates in all segments of the natural gas business. Due to this, earnings can fluctuate some due to commodity prices, as well as capital requirements for exploration and production. You have to expect this when investing in National Fuel.

Bottom line

Each of these companies provide stable and increasing portfolio income through different means. Whether it be Aqua America through acquisitions, Southern Company through operational efficiency, or National Fuel through segment diversification - all are good starting points for adding the steady income of utilities to your portfolio.

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Justin Pope has no position in any stocks mentioned. The Motley Fool recommends Aqua America and Southern Company. 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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