Nothing is certain in the current global economy. Markets have gone back and forth in the past few years, with crises as disparate as flash crashes, looming debt ceilings, and possible Greek insolvency sparking fears worldwide. One sector in particular is notably well-equipped to navigate, and even succeed, in these difficult times: utilities.
This high-dividend, stable industry enjoys a wide customer base, government-approved monopolies, and control over invaluable daily necessities like electricity and water.
The following four companies have market caps in the tens of billions of dollars, earnings multiples below the teens, and dividends north of 4%. Let's take a look, shall we?
Fear not -- we pay a dividend
Exelon (NYSE: EXC ) has about as much experience in the utilities sector as anyone. Founded in 1887, it has become the largest publicly traded diversified utilities company in the world. And diversified it is! The company generates power through nuclear, fossil, hydro, and renewable energy sources, and markets to commercial, individual, and wholesale customers.
Given its mammoth size, varied operations, and long history, at first glance Exelon's 5.4% dividend yield makes it appear to be a no-brainer investment for any sensible dividend seeker. But it's the payout ratio -- the percentage of earnings that goes to distributing dividends -- that should make investors take pause:
Exelon's payout ratio is far higher than its peers', which is not good. This means Exelon's dividend could be unsustainable. If it is sustainable, it could mean that it doesn't have a whole lot of room to grow. The company reports earnings on Aug. 1, so investors should be able to get some further glimpse into whether this dividend is financially sound.
Public Service Enterprise Group (NYSE: PEG ) , is the second-largest diversified utility company, with a market cap of $16 billion, just under half of Exelon's. We can see from the above table that while it just barely has the lowest yield of all the companies, it also has the lowest payout ratio. A low payout ratio indicates the company is being somewhat conservative about how much cash it returns to shareholders. That's OK, because one of the worst things a company can do is cut its dividend payment. The rule of thumb is: If you can't keep paying it forever, don't increase it. I'm glad to see that philosophy in action here.
PPL (NYSE: PPL ) is an electric utility company with a solid record for paying dividends. It has been increasing the payout since 1999, when the company paid shareholders $0.50 per share. Just over a decade later the company is paying out nearly triple that amount: $1.44 annually. That's some solid dividend growth.
Founded in 1920, this $16 billion company has a reasonable payout ratio as well. PPL shouldn't be cutting its dividend anytime soon.
American Electric Power (NYSE: AEP ) is another one of the largest electric providers in the U.S., with more than 5 million customers in 11 states.
This company has a rich dividend history -- 102 years, in fact. The dividend peaked in 1990 at $2.40 annually, which was kept static until 2003, when management had to slash it. Since its trough in 2004, however, that dividend has been steadily increasing, and last year the company returned $1.85 in cash to shareholders. If you're looking for a company with a growing, solid, and supportable dividend, American Electric Power fits the bill.
The past year has been very good to utilities shareholders; the sector has beaten the S&P 500 by more than 7% in that time. Given the uncertain economic environment of today, I believe utilities still have a ways to rise. Investors are unwilling to throw their money in uncertain, make-it-or-break-it ventures, and understandably so. The consistent dividends of these four stocks and the overall mood of the market are two reasons I rated all four of these companies as "outperform" on my CAPS page in June.
If you're thinking about investing for income, utilities aren't the only place to look. The Motley Fool's free report "Secure Your Future With 9 Rock-Solid Dividend Stocks," gives you a variety of well-established businesses with high dividends to choose from. Get your free report today, click here.