You Can’t Beat These Utility Dividends

The utilities sector is far from perfect. Most of the sector is levered to its teeth with debt as companies scramble to expand and update existing electrical grids. They do this on the idea that the end product (i.e., electricity) will always be in demand regardless of economic conditions -- and to a majority extent they’re right.

Oil and natural gas prices can also positively and negatively affect the bottom line. A company that finds itself levered to the max can encounter serious issues if commodity pricing doesn’t go its way. Dynegy (NYSE: DYN  ) , for example, has already warned that it may not be able to meet its debt obligations in the second half of this year as the company has struggled mightily to return to profitability. Luckily for us, there are only a handful of bad seeds in the utilities sector; weeding out the best of the best is actually the toughest part. I consider this just the tip of the iceberg and encourage further research, but these five utility companies have unparalleled dividends and other encouraging similarities.

Company

Years Paying

Current Yield

Current Market Value/

Enterprise Value

DTE Energy (NYSE: DTE  )

41

4.53%

0.51

Duke Energy (NYSE: DUK  )

27

5.31%

0.59

FirstEnergy (NYSE: FE  )

13

5.66%

0.46

Progress Energy (NYSE: PGN  )

26

5.33%

0.53

Entergy (NYSE: ETR  )

29

4.88%

0.53

Sources: Yahoo! Finance and Dividata.com.

As you’ll notice, this list could have been 30 companies long -- but there’s a reason I chose some of the largest names in the sector.

For starters, larger companies have even more stable dividends. Take DTE, for example, which has paid a dividend for 41 years. Outside of a special dividend paid in 1988, the company has never lowered its quarterly distribution.

More importantly, the trend in the utilities sector has been and probably will continue to be consolidation. Last year FirstEnergy purchased Allegheny Energy for $4.7 billion in order to decrease competition and take advantage of the cost savings of merging their two businesses. A buyout in this sector entails not only purchasing power grids, but also taking on sometimes substantial amounts of debt.

As you can see by the listed enterprise values above, debt makes up a larger portion of what the theoretical buyout values would be for these energy behemoths. It only seems likely then that these companies will continue to explore opportunities which can help reduce debt and lower costs by merging. There’s not only a solid dividend underlying these utilities, but a good chance their stock prices could move higher if the sector continues to consolidate.

What, if any, utilities do you have in your portfolio? Share your ideas in the comments section below and consider tracking these and your own list of personalized companies with My Watchlist. Add DTE Energy, Duke Energy, FirstEnergy, Progress Energy and Entergy to My Watchlist.

Also, feel free to grab your copy of our latest free report, 3 Stocks for $100 Oil.

Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could still use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. 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 that never short-circuits.


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Related Tickers

10/30/2014 4:04 PM
DTE $81.99 Up +1.94 +2.42%
DTE Energy Company CAPS Rating: *****
FE $37.51 Up +0.93 +2.54%
FirstEnergy Corp. CAPS Rating: ***
DUK $82.29 Up +2.02 +2.52%
Duke Energy Corp CAPS Rating: ****
DYNIQ.DL $0.00 Down +0.00 +0.00%
Dynegy, Inc. CAPS Rating: ***
ETR $84.24 Up +2.18 +2.66%
Entergy Corp CAPS Rating: ****
PGN $4.92 Down -0.27 -5.20%
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