Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, I want to dig into an electric utility that's like no other that I'm aware of, Hawaiian Electric Industries (HE -1.88%).
Intertwined with Hawaii
Hawaiian Electric, or HEI, is an interesting utility in that it provides a monopolistic 95% of the energy for Hawaii, and is also the state's largest banking entity for commercial purposes. As you might imagine, having its revenue tied intricately to Hawaii's economy places a lot of pressure on growth in Hawaii's tourism business in order for HEI to boost its own bottom line.
Factors that could derail HEI's growth include weak Japanese tourism and an inability to enact electricity price hikes. Not surprisingly, one reason high-end luxury retailer Tiffany has struggled in recent quarters has been a slowdown in Japanese tourist spending at its upscale jewelry stores. This proves first-hand that strong tourism rates are vital to a successful Hawaiian economy.
Luckily for HEI, there are plenty of facts and figures already in place that lead me to believe this utility is headed in the right direction.
Renewing your faith in Hawaii and HEI
To begin with, Hawaii itself is performing much better than the U.S. as a whole, with an unemployment rate of just 5.3% relative to the 7.7% national unemployment rate. Hawaii's state visitor arrival and state visitor expenditure figures in 2011 both rose solidly, leading me to believe that Hawaii's growth prospects are set to outpace the national average over the next few years.
Second, HEI has a monopoly over electricity generation in the region which gives it incredible pricing power and puts up a near impenetrable barrier to entry for those who would consider entering the market. As long as it continues to get favorable approvals from the states' energy regulators, it should be able to boost energy prices to completely cover any additional alternative energy build-out projects.
Third, and what I find to be the most important aspect of HEI, it has a primary focus on delivering electricity through alternative energies. As of 2011, HEI derived 12% of all electric generating capacity from renewable energies and it looks on track to have 15% of capacity coming from renewable by 2015.
While HEI is still smaller in scale than NextEra Energy (NEE -0.29%) the United State's leading renewable energy provider, it's nonetheless making strides that few other utilities have made. For example, HEI is generating 110MW of capacity from biofuels alone at its Campbell Industrial Park generating station. It also has been expanding its solar fields, pushing for approval of geothermal energy sources with state regulators, and has been implementing wind fields to boost capacity. Some of the nation's largest electricity providers – like Exelon (EXC -0.30%), which has chosen to focus on nuclear and solar, and Duke Energy (DUK 0.04%) which has made big investments in wind energy – don't have nearly the same renewable diversification that HEI can offer investors.
The use of renewables is important because they not only help reduce our carbon footprint, but, over the long run, these energy sources actually prove to be cheaper than fossil fuels. It's also important because the Hawaiian government has mandated that 40% of HEI's electricity should be renewable by 2030.
Generating big payouts
The final factor that'll make any energy and utility investor jump for joy -- if HEI's renewable diversity didn't already excite you – is the company's incredible dividend.
Unlike previously highlighted companies in this series, HEI isn't much of a challenge when it comes to annual increases. In fact, HEI hasn't raised its annual payout since 1996. However, that doesn't matter much since its current payout of 4.9% is one of the highest in the industry. Furthermore, the company's payout ratio, which for a time exceeded its EPS during the recession, is at its lowest levels in about a decade based on its trailing-12-month results. Remember, the recession was also when HEI began spending big to boost its focus on renewable energy as well.
Source: Morningstar.
While I'm not calling for a dividend boost, I am saying that HEI's payout is incredibly safe and the chance of a dividend cut seems extremely low.
Foolish roundup
It'd be pretty difficult to argue against owning an electric utility that pays out one of the highest yields in the industry, boasts an electricity monopoly, and is based in a state performing considerably better than the nation as a whole. It gets nearly impossible to do so when you factor in that its bank, American Savings Bank, has benefited from an improved loan portfolio and lower loan loss reserves. If you're an income seeker that's looking for socially responsible companies like those my Foolish colleague Alyce Lomax seeks out, make sure you give HEI and its incredible dividend a good, hard look.
