Utilities are boring. Since you’re not
going to find the next Google or Apple in the group, owning utilities
doesn’t give you anything to talk about in the locker room.
A Lot to Like
But there’s a lot to like about utilities. For starters,
utilities typically enjoy monopolies in their market area. They don’t
have to worry about losing customers to some new website or
technological gadget. An economic slowdown might temporarily cut
demand for electricity or natural gas. But, long-term, utilities
typically grow revenues and earnings in the mid-single digit range,
annually. Utilities in faster growing regions do better, and those in
regions with struggling economies do worse. While utility share prices
might drop with the market during a downturn, they usually recover
when the market revives.
All About Dividends
All that said, for most
investors, dividends are the main attraction for utilities. Dividends
are regular cash payouts that you receive for simply owning a stock.
While you’re lucky to get 1% from a bank
these days, many utilities are paying dividends equating to
4% or higher yields (your dividend yield is
the dividends that you receive over the next 12-months divided by the
price that you paid for the shares).
When the market dips, you’ll still
receive your dividends while you wait for the market to recover. That
only works, of course, if your stock continues to pay its dividends as
expected, and that’s the advantage of owning utilities. Because they
produce steady and predictable cash flows, dividend cuts are rare.
Screening For Utilities
You can use Morningstar’s free
(registration required) and easy to use
stock screener to find utility candidates. If you’re not familiar with
the term, a stock screener is a program that you can use to search out
stocks meeting your specific requirements. Here’s how to use
Find the screener from Morningstar’s
by selecting Stocks, and then
Stock Screener in the Tools section.
Start by selecting Utilities from the Stock Sector dropdown
menu. Then, specify $1 billion for minimum market capitalization
(value of all shares out) to rule out smaller utilities, which tend to
be riskier than larger firms.
Next, we’ll use Morningstar’s
profitability and financial health stock grading features to pick
high-rated utilities in those categories. Morningstar grades stocks
from A to F, where A is best. Check the A, B, and C boxes for
Profitability Grade, and the A and B boxes for Financial Health. These
selections require passing utilities to be average or better in terms
of profitability, but with above average financial health.
To be on the safe side, I also checked
return on equity, a standard profitability gauge that can be applied
to stocks in any industry. It compares the last 12-month’s earnings to
shareholders equity (book value). Anything above 10% is okay for
utilities in this market and that's the minimum value that I specified
for this screen.
Finally, I selected a minimum
4% dividend yield. That’s it. Select Show
Results to see the list of passing stocks.
My screen listed these eight utilities. If your screen lists
more than five or six utilities, click on the Dividend Yield column
label to sort the list with the highest yielding utilities at the top.
All else equal, go for the highest payers.
Vectren (VVC), which is paying a 4.9%
expected dividend yield.
• Entergy (ETR), 4.8%
• Hawaiian Electric
Industries (HE), 4.6%
Public Service Enterprise (PEG), 4.4%
• American Electric Power (AEP),
Southern Company (SO), 4.2%
SCANA (SCG), 4.1%
UNS Energy (UNS). 4.1%
Since expected yields move inversely to
share prices, you may see different values when you run the screen.
As always, consider
the screen results to be research candidates, not a buy list. The more
you know about your stocks, the better your results.