Many conservative investors like utility stock in their portfolio. Why is that? At least four factors account for their high status with many investors: They produce a product that is always in demand, they tend to be stable cash-flow generating firms, they have near-monopoly status in many markets and many pay generous dividends.
Utilities in a Rising Interest-Rate Environment
Nevertheless, utility stocks are not perfect investments. They can go down in price after you buy them. This most likely will happen during a rising interest-rate environment, a scenario in which the US economy currently finds itself.
When rates rise, conservative investors can elect to invest in new bond issues, which now carry a higher yield and will not lose value if held to maturity. Additionally, the utility company’s cost of new borrowing is higher as interest rates rise, which squeezes profits.
The Top Five Utility Stocks According to Eric Landis
A recent article by Eric Landis, a noted pundit on dividend growth investing, suggests that the recent decline in utility stocks may be about over. He points out that some utilities are in bear market territory now by some measures, suggesting that value investors might want to step in.
Mr. Landis keeps a watch list of thirty utility companies. His article rates them all. Here are the top five picks based on yield and total return projections:
- Dominion Energy: Aggressively growing its dividend yield at a 9.6% annual rate over the last five years, this stock currently yields 5.05%. It is Mr. Landis’ top pick.
- PPL: Currently yielding a whopping 57%, PPL has grown is dividend at an annualized rate of 3.3% over the last ten years.
- The Southern Company: Based in Atlanta, Georgia, The Southern Company has a 17-year history of dividend grown. It now yields 5.19%.
- Center Point Energy: Serving the Houston, Texas metropolitan area is another strong dividend grower, now yielding 4.36%.
- OGE Energy: The parent company of Oklahoma Gas and Electric rounds out the top five, with a current yield of 4.02%.
If you are a conservative stock investor interested in generous yields, this list may be of interest to you.