Power Up Your Payout

With Treasury bond yields in record low territory, investors looking for yield should consider getting a check from the electric, gas, or water company. Utility company stocks typically have high dividend yields, stable businesses, and considerably less volatility than the broad stock market.

To help find some candidate stocks, the CAPS screener searched for stocks meeting the following parameters:

  • Utilities sector.
  • CAPS rating of four or five stars (out of five) to focus on stocks the CAPS community believes are the best choices.
  • Price-to-earnings ratio less than 18 to weed out companies that don't have enough earnings to cover a juicy dividend.
  • Current dividend yield greater than 4.5% to generate more income than a 30-year Treasury.

The screen returned 31 stocks. For the next step, I researched growth estimates and payout ratios -- the percentage of earnings needed to cover the dividend -- to narrow the field.

Even in a boring utility stock, earnings growth is important. The numbers won't compare with a highflier like Apple, but if there isn't enough earnings growth to support some increases in the dividend, there isn't much reason to choose the stock over a bond.

Payout ratio is also important. Utility stocks typically pay out a large percentage of earnings as dividends, but numbers pushing 80%-90% or higher are a red flag that the dividend might not be sustainable.

I also didn't carry non-U.S. companies forward. There may be some great non-U.S. utility investments, but I didn't want the currency exchange risk for this drill-down. That whittled the list to the following seven stocks.

Company

Current Dividend Yield

Est. Annual Growth,
Next 5 Years

Payout Ratio

Black Hills (NYSE: BKH  )

5.1%

6.0%

64%

Consolidated Edison (NYSE: ED  )

5.5%

4.3%

72%

Duke Energy (NYSE: DUK  )

6.1%

4.4%

104%

Exelon (NYSE: EXC  )

5.5%

1.5%

51%

PG&E (NYSE: PCG  )

4.5%

7.3%

53%

The Southern Company (NYSE: SO  )

5.5%

5.1%

70%

Westar Energy (NYSE: WR  )

5.8%

9.3%

83%

Source: Motley Fool Stock Screener and Yahoo! Finance.

The Southern Company's good dividend yield, combined with decent earnings growth projections, make it the leader of this pack in my book. Black Hills and Westar also look attractive, but don't have the size or geographic diversity of Southern. PG&E also sports a good growth projection, but its concentration in California concerns me. As always, screener output and quick-look research lists should not be considered a recommendation to buy, but just a starting point for more research.

Have an opinion on these stocks or utilities in general? Weigh in with a comment below.

Related Foolishness:

Exelon is a Motley Fool Inside Value selection. Apple is a Motley Fool Stock Advisor pick. Duke Energy and Southern are Motley Fool Income Investor choices. Motley Fool Options has recommended writing puts on Exelon. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Russ Krull does not have a position in any company mentioned in this article. The Fool has a high-voltage disclosure policy that lights our path.


Read/Post Comments (8) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 06, 2010, at 6:25 PM, JohnnyJay wrote:

    The utilities listed are all good companies but you left out a fee other's that fit this standard, they are:

    Dominion Resources -D

    NewEra Energy - NEE - formaly Florida Power(FPL)

    Allant Energy - LNT

    All three are solid companies that have raised their dividends every year for at least the past 15+ years.

    They are all stable with good steady growth and their div. yield & payout ratio fits right in line with the one's that were listed. I own all three in my retirement acct. & know that when the time comes to take the cash instead of currently reinvesting the div. the money will be there to help make retirement easier. If you don't own these stocks now I strongly suggest that to look into adding them to your portfolio.

  • Report this Comment On July 06, 2010, at 6:37 PM, Puckplayr4 wrote:

    I am VERY grateful to finally see an article on a sector I am heavily interested/invested in. I am heavy on EDE, the Empire District Electric Company, and NGG. Both pay high dividends (6.78 and 9.5 respectively) which at least to my uneducated eye, appear to be sustainable. NGG also has a presence (3.4 million customers) in the States and 11 million in the Unitied Kingdom, I like the footprint. I also just found and think I love TYY and/or TYG...P/E's of close to 2.9 and Dividends around 6.8.

    I was sad to see my stocks didn't make this list so I am going to take a 2nd look at my picks, but these picks all look like winners and I'm going to (again) take a long look at SO.

    I remember some old black and white movie where the rich uncle is about to croak and he said he made all his money on utility and railroad stocks. Maybe I shouldn't take my advice from ancient TV...but it worked then, and talk about a Moat...I'm just not seeing our need for electricity going anywhere for the next billion years or so. Boring...maybe...but man I love these stocks. Any of them...Stress free money.

  • Report this Comment On July 06, 2010, at 9:41 PM, blesto wrote:

    Well JohnnyJay,

    Those may be decent companies, but they didn't fit his screen criteria.

    Dominion Resources -D Only a 3 star a P/E more than 18

    NewEra Energy - NEE - formaly Florida Power(FPL) Met the 4 to 5 star criteria and a P/E of 11.10, but the div yield falls short at 3.8%

    Allant Energy - LNT Only 3 star and P/E way high at 42.50, a decent div though.

    Thats the beauty of a screen, it lets you be picky.

    Even if you eliminated the CAPS star rating, they still would have been cut from that list.

    You could add another criteria if you want like the current ratio and get a whole different set of results.

    Set the screen up with criteria you feel is important and you may even surprise yourself.

    Cheers

  • Report this Comment On July 06, 2010, at 10:27 PM, rd80 wrote:

    @JohnnyJay - As blesto commented, the stocks you listed didn't meet all the screen criteria. There's nothing special about the parameters I set up and missing the screen doesn't necessarily mean they're not good picks.

    @Puckplayr4 - NGG did make the screen, but I didn't include it in the table because it's a UK stock and I wanted to stick with US companies for this. If you can get to it, Barron's had a positive piece on NGG today.

    Disclosure - I own some NGG.

    Many thanks to all for the comments.

  • Report this Comment On July 06, 2010, at 10:47 PM, goalie37 wrote:

    I love any article promoting dividends. Your list will give me some research time tonight.

    I would like to add that should this down market continue go down, for even a short period of time, many of the world's premiere brands will be paying some hefty yields. Watch the yields on some of these companies over the next few weeks...

    KO (currently 3.5%)

    CVX (currently 4.2%)

    JNJ (currently 3.6%)

  • Report this Comment On July 06, 2010, at 11:52 PM, goalie37 wrote:

    Adding some further research -

    BKH - 5 year annual dividend growth 2.75%

    ED - 5 yr grwth 0.87%

    DUK - 5 yr grwth -3.09%

    EXC - 5 yr grwth 10.84%

    PCG - 5 yr grwth 6.45%

    SO - 5 yr grwth 4.13%

    WR - 5 yr grwth 8.45%

  • Report this Comment On July 07, 2010, at 12:02 AM, goalie37 wrote:

    Sorry to spam response. Wanted to add the five year dividend growth for the three stocks I mentioned -

    CVX - 11.7%

    KO - 10.4%

    JNJ - 12.0%

  • Report this Comment On July 07, 2010, at 7:13 AM, mrconnors0531 wrote:

    A new period is about to begin. That is the electric car evolution. Utilities will begin a whole new era of growth as they replace gas driven cars with stored energy vehicles. Each year from here until a new energy source is found will mean more monies being spent on utilities instead of oil based companies. I am surprised that the oil companies aren't buying up utilities to replace revenue at risk. I do own EXC because of their nuclear production. A few years ago I played golf with Engineers up dating one of their plants, they said it was worth owning. Price then high 60's, Now high 30's I'm buying and with a 5.5 yield.

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