The foundation of most dividend portfolios is based on utilities. Utility companies often provide lower volatility in relation to the overall market while paying out a good portion of their earnings to shareholders in the form of a dividend. Most importantly, utility companies provide a product -- electricity, water, or gas -- that is an absolute necessity regardless of current economic conditions, making them a solid investment in a booming economy or in a recession.
The attraction to the electric utility sector is the plethora of delectable dividends. You can pretty safely invest in this sector and land a stable dividend. However, there are two companies in this sector that stand out above their peers and also one that I feel fails to make the cut.
Southern Co. (NYSE: SO ) -- trust it
One aspect you need to understand about electric utilities is you won't get any barn-burning growth, and Southern is evidence of this. The company's five-year projected growth rate of 5.5% might put most investors to sleep, but a 4% compounded annual growth rate in the company's dividend over the past five years is nothing to sneeze at. Aside from a special dividend in 2001, the company hasn't lowered its quarterly distribution in the past 29 years -- that's consistency.
Providing electricity throughout much of the Southeastern U.S. and competing against smaller rivals CenterPoint Energy (NYSE: CNP ) and NextEra Energy (NYSE: NEE ) , Southern simply stands out above its peers. CenterPoint's dividend has dropped dramatically within the past decade while NextEra sports a higher debt-to-equity ratio than Southern and a dividend yield nearly 1% below Southern. Southern's dividend doesn't appear to be going anywhere but up anytime soon, and for that reason it's a dividend you can trust.
DTE Energy (NYSE: DTE ) -- trust it
Hey, General Motors, you aren't the only show in town in Michigan! DTE Energy provides electric and natural gas services in Michigan and has an impeccable record of maintaining its dividend over the past 41 years without a drop in its quarterly distribution. Go ahead and scoff all you want at the company's 1.7% five-year compounded dividend growth rate -- you won't find a more stable dividend in the electric utility sector.
Currently yielding 4.5%, DTE Energy's yield doesn't seem spectacular next to competitors CMS Energy (NYSE: CMS ) or Wisconsin Energy (NYSE: WEC ) . But dig a little deeper and you'll uncover that CMS and Wisconsin Energy have both suffered substantial reversals in their dividend distributions recently. DTE isn't going to give you an exciting business model or double-digit growth, but you'll definitely sleep better at night with this dividend under your pillow.
Ormat Technologies (NYSE: ORA ) -- avoid it
OK, so Ormat isn't a traditional electric utility. The company operates in the geothermal and recovered energy business, so it's more of a pioneer of technology than an old-fashioned operator of electric grids. Just because Ormat is on the cutting edge of electrical generation doesn't give this company a free pass.
Ormat has committed the ultimate no-no in the electric utility sector: reducing its quarterly distribution. Sometimes this can be a forgivable offense, especially given the high yields often found in this sector, but not in Ormat's case. The company was only throwing peanuts at investors from the start, so imagine how shareholders must feel knowing their quarterly distribution has fallen from $0.12 in to $0.04 in just five quarters. Now yielding less than 1% and sporting a P/E ratio significantly higher than many of its peers, Ormat demonstrates that while it may be on the cutting edge of power generation, it has a long way to go before it earns the trust of dividend-seeking investors.
Foolish roundup
The electric utility sector is flooded with great choices and high yields. Always remember to take your time and dig deeper than just the current yield to see how a company has treated shareholders in the past -- that could be the difference between a good dividend and a great one.
What electric utility dividends are you holding? Share your ideas in the comments section below and consider adding Southern, DTE Energy, and Ormat Technologies to your watchlist to keep up on the latest in the electric utility sector.
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