Shelter From the Storm?

While utility stocks have never won any prizes for excitement, some investors sure like those dividends. Check out the Utilities Select Sector SPDR ETF, which contains solid utilities stocks like Southern Company, Pacific Gas & Electric Company, and Public Service Enterprise Group.

Feb 10, 2014 at 5:15PM

All three of the major averages had a weak January. The Dow Jones Industrial Average sold off the hardest to finish the month down 5.3%, while the NASDAQ displayed the most strength of the three with a 1.7% haircut. The broad-based S&P 500 ended January off by 3.6% -- close to the midpoint between the other two.

The S&P 500 index consists of 500 stocks encompassing many different types of businesses that collectively represent a broad spectrum of the U.S. economy. And because of how the broad market reacted to various pieces of economic news from around the world during the month of January, now might be an excellent time to take a closer look at the different types of business sectors that comprise the S&P 500.

The Select Sector SPDR ETFs are exchange-traded funds that essentially divide the S&P 500 into nine separate indexes according to business type: Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Technology, and Utilities. And because stocks often move in groups like schools of fish, investors who monitor these groups can stay abreast of any pockets of relative strength or weakness that may be occurring within the market.

Institutional investors and long-term investors with a sense of history have come to realize that the sun doesn't always shine on all sectors of the market. So far in 2014, one of the few sunny spots -- the top performer of the nine Select Sector SPDR ETFs -- has been the dividend-rich Utilities Select Sector SPDR (NYSEMKT:XLU) ETF, which is up 4% in a year when its broader-based parent index, the S&P 500, has lost almost 2%.

Investors' logic is that if portfolio appreciation is slowing down as the market takes a restful pause after a particularly bullish 2013, why not park some money in a relatively safe market sector and earn a decent return while waiting out the slow period? This Utilities ETF is comprised of 31 companies, and this article will highlight three of them. All three of these stocks pay dividends of more than 4% and were up as of the end of January.

Southern Company (NYSE:SO)recently completed a four-year project to integrate "smart-grid technologies" into its distribution system.  Besides improving its grid efficiency, security, and reliability, this innovation enabled Southern Company and its subsidiaries to avoid sending nearly 85,000 trucks on service calls that would have totaled more than 900,000 miles through September 2013, saving more than $5 million in service costs in the process. The increased efficiency resulting from these smart-grid technologies allows Southern Company and its subsidiaries to continue to offer electric power at costs below the national average.

Southern Company stock ended 2013 at a share price of $41.11 and has been flat so far this year.

The graph below shows the yearly dividend payout beginning in 1997.

So Annual Dividends Issued

Source: Southern Company.

There has been a steady progression from about $1.30 in 1997 to just more than $2 last year, and with the company scheduled to pay its first quarterly dividend of about $0.51 in March, 2014's dividend should exceed last year's by a few cents and therefore continue the gentle upward slope in trend. In order to calculate the dividend yield, we simply divide the recent share price of $41.10 into the $2.03 projected payment for this year to arrive at 4.9%.

Pacific Gas & Electric Company (NYSE:PCG)has been actively campaigning to increase energy efficiency within its client base since 2011. The company earmarked more than $50 million for its "Energy Efficiency Financing Program," through which it has issued 500 interest-free loans to business and government customers so they may invest in better, more energy-efficient equipment including lighting, refrigerators, electric motors, air conditioners, and water pumps.

Because the new equipment results in a lower energy bill, PG&E then adds a surcharge to bring the total bill back up to what the customer was paying before the equipment upgrade, and it is this surcharge that pays off the loan over time. Once the loan is paid, the customer continues to enjoy the upgraded equipment and a lower energy bill, while the more efficient equipment creates less of a capacity strain during peak hours.

Pacific Gas & Electric stock has stayed well ahead of the broader market in 2014, forging 5.5% higher year to date. While the company suspended its dividend program for a few years beginning in 2001, its corporate website shows a steady dividend history going back nearly 100 years to 1917.

The company has been paying $0.455 each quarter since April 2010, which works out to $1.82 per year. Assuming the same $1.82 dividend payment for 2014, the yield would work out to 4.35% based on the recent closing price.

The Dow Jones Sustainability Index selected Public Service Enterprise Group (NYSE:PEG)last September for inclusion in the DJSI for the sixth year in a row, only five months after the Solar Electric Power Association ranked PSEG third among U.S. utilities for the amount of solar capacity added to its service area in 2012. This was the fourth year in a row that PSEG ranked in the top three utilities for solar integration. The company also received the PA Consulting ReliabilityOne Award in 2013 for the 12th year in a row and was named America's Most Reliable Electric Utility five times over a period of nine years.

Even for a utility, this is one stable company!

As of the end of January, the stock was showing a 2014 appreciation in share price of a little more than 4%. The graph below shows both consistency and steady growth in PSEG's dividend payouts since 2003.

Pseg Annual Dividend Rate

Source: PSEG..

Public Service Enterprise also claims that it has paid dividends each year since 1907 and that the only two companies to match that record are General Electric and ExxonMobil. If we were to assume the same 2013 figure of $1.44 in 2014, the yield would work out to 4.2% based on the recent closing price of $33.95.

Many investors like to have at least a part of their portfolio in an investment vehicle that yields interest, and with the yield on the 10-year Treasury note currently near 2.7%, utility stocks can offer a viable alternative.

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S. K. Novak has no position in any of the stocks mentioned. 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.

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