Utilities are Still a Good Investment for the Squeamish and Shell-shocked

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

The last few years have been hard on a lot of people. Individuals who experienced 2008 probably wish they had gone with utility stocks back in 2002. Utilities are not immune from downturns, but they tend to be a bit more resilient.

Electrical utilities are probably the best of the bunch, and that will be the primary focus here. In a modern society, everyone needs electricity. Electrical companies also enjoy limited monopolies. There is little choice when it comes to choosing a utility. Normally, the only choice is to get solar panels or something similar to lower reliance on the local utility. Income for utilities tends to be very durable, and rarely would they need to pass down all cost savings down to the customers.

Utilities do not move very much. That is the safe aspect of them. They also tend to have higher than average dividends. Average compared to companies like IBM, not REITs or other special vehicles. Dividends can be over 5%. That kind of yearly payment with a very stable share price is a great way to make a small but consistent return. This would be a good choice as you get older and want to move to stability.

Exelon Corp (NYSE: EXC) is the first on my list. The reason is that it is near its 52-week low. That is as good a place as any to take a long-term dividend position. Exelon currently has a yield of 5.78%. Cash flow looks strong, and is enough to cover the dividend. The dividend has been pretty stable for the last few years, and there is no reason to suspect this will change soon. Debt is normally a concern for me, but because utilities have large capital expenditures with a stable income it is not an issue here. Utilities can safely extrapolate into the future within reason and make their decisions based on that. Other companies cannot rely on projections with as much faith. There is probably some capital gains to be had as well, since the P/E is lower than its competitors by just a little.

Pepco Holdings (NYSE: POM) would be just as good if not for the large amount of debt. It has a dividend yield of 5.63%. Take a look at how tight the 52-week range is. Pepco is very stable, and so is the dividend. However, I do not like that cash on hand is so low considering the large amount of debt. If Pepco is tapping into cash to pay for the dividend instead of using cash from operations, then that is a problem. Low cash seems not to have affected the dividend, but I would just err on the side of caution. Exelon has a great dividend so we might as well choose that one.

Duke Energy Corp (NYSE: DUK) might just be too expensive, despite all the other positive factors. It did complete a merger that should start to pay off, and despite its recent run it might still have a lot more to move. Relying on merger benefits is riskier though. If you come to utilities looking for safety then you might want to look elsewhere. However, if you are fine with a bit more risk and want the watered down risk of utilities it might be the right choice. The Trefis link above shows a target of $70. If it does move from here it would be a nice but slight gain. The dividend yield is 4.74%, which is respectable. Cash is almost $2 billion, which is nice and comfortable. Compared to Pepco, Duke is in a better position.

Conclusion

Utilities are great if you want something very stable. All the companies listed have a stable dividend, and do not move too much. Exelon is near its 52-week low, which gives them the chance for some capital appreciation. Duke has a merger catalyst. If the gains from that start materializing as increased revenues, profits will go up. If it can generate more cash, Duke might increase its dividend down the road. Every portfolio needs a healthy dose of safety. Utilities are a great way to suck the volatility out of your portfolio and earn a dividend. Pad your gains with some covered calls if you can make it worthwhile. Obviously premiums will be very low, but if you have enough shares it could be worth it. Utilities are all about the long game, the shortsighted need not apply.


TheArchivist has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Exelon. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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