Published: October 9, 2009
If you think "widow and orphan" utility stocks
are boring, then you've never heard of this one.
It's an electric utility that has increased its dividend each
year for the past 20 years. Not only does it offer its
shareholders an above-average yield, it also has outperformed
its peers in the toughest economic environment in decades.
That's pretty far from "boring" these days. In fact, this may be
the most exciting company serious income investors could add to
The nation needs power in good times and bad, and that's one
reason power companies tend to be reliable, resilient
investments. They don't offer much growth, but they compensate
for that with strong dividend yields. And there are capital
gains to be had: Utilities' prices tend to trend upward over the
That's a combination income investors like. And with those
factors in mind, here's the one utility they should like the
most right now, the one that outperforms its competitors.
How did I find this winner? By
examining the nation's utilities and
crossing off any company that didn't
meet my standards.
I started with the critical premise
that all income investors begin
with: Show me the money. Below is a
list of electric utilities that
yield above 6%.
It's best to take dividends one step
further. Don't stop with the yield
-- take a look at how easy it is for
the company to meet its dividend
payment. In the chart below, the
third column shows each utilities
payout ratio. This is calculated
using the companies' operating
income and dividend payment from the
most-recent quarter. If you like,
you can put the payout ratio in the
blank in this sentence: "This
company paid out ____ of its
operating earnings in dividends."
It doesn't look like any of these utilities is up against the
wall and in the untenable position of being forced to cut its
dividend. (Hawaiian Electric may be a little too close for
comfort for some conservative investors.) Also keep in mind that
companies with low payout ratios have more breathing room and
may be able to increase their dividends in the future.
Dividend safety is only part of the story, though. Defensive
stocks should move up with the market and also demonstrate
resilience during downturns. The past year has been a stress
test for all stocks. Let's see which utilities passed.
The total return of the S&P during the past three years is
-15.4%. We need companies that not only beat the S&P but also
posted positive total returns. After all, what good is a 6%
dividend yield if the underlying security that produced it loses
half its value?
When I applied those criteria to our list, two utilities
remained in our competition.
Progress Energy and Unitil are the only two high-yielding
utilities that managed a gain during the past three years, an
impressive feat considering the 2008 bear market.
Two things give Progress the upper hand.
First, it has a better dividend coverage ratio, meaning itís
less likely to cut its dividend and has more room to raise it.
In fact, it's the only company out of the original eight that
could cover its dividend with its net income.
Given this, it might not surprise you to learn that Progress has
an impressive 20-year streak of annual dividend increases.
Second, Progress Energy's five-year total return beats out
Unitil by an impressive 14 percentage points. Tack on the higher
yield, and investors can buy a stock that give them a bigger
paycheck and one likely to continue to outperform its peers.
Recent news points to a bright future. Progress will be allowed
to charge higher rates in Florida in January. This will be a
significant revenue booster, as more than half its 3.1 million
customers are in Florida.
Progress has outperformed its peers in tough economic times and
has a track record of increasing dividends. Investors looking
for a safe, reliable 6.5% yield could consider adding Progress
to their portfolios.
-- Francisco E. Bermea