3 Things to Know Before You Buy Duke Energy Stock

This article was updated on Oct. 6, 2014.

A strong dividend yield that will actually grow in the future is hard to find. However, one such company that offers the best of both worlds is Duke Energy (NYSE: DUK  ) . Based in Charlotte, N.C., Duke Energy has been keeping the lights on for more than 150 years and has been paying a dividend to investors for over 88 years. However, before considering whether to buy stock in the company, here are three very important things you need to know. 

It's getting gassy
Duke is the largest utility in the U.S. by almost any metric. It has just about $115 billion in assets including 57.5 gigawatts of generating capacity all designed to power the lives of its 7.2 million customers. That's more than nuclear kingpin Exelon's (NYSE: EXC  ) nearly 35 gigawatts of generating capacity as well as its 6.6 million customers. It's also larger than wind-powered NextEra Energy's (NYSE: NEE  ) more than 42.5 gigawatts of capacity as well as its 4.7 million customers.

However, what's important here is knowing the direction Duke Energy is going as it continues to grow. Just like its large peers Duke Energy is focused on shifting its generating portfolio away from coal. In fact, the company plans to cut coal's portion of its generation portfolio from 55% back in 2005 to 38% by 2015. However, instead of using renewable energy options like wind, Duke Energy's future is being fueled by natural gas, as its portion of the generating portfolio has gone from just 5% all the way to what should be around 24% by next year. Given the amount of natural gas we've discovered, and its low price, that move makes a lot of sense.

Not just an American story
Currently 86% of Duke Energy's revenue comes from its regulated utilities located in the Midwest, Florida and the Carolinas. Another 2% of the company's revenue comes from commercial power, which houses most of its wind and solar assets. The other 12% of the company's revenue comes from its international operations, which are located in Central and South America. This is a business that the company could continue to grow. However, Duke Energy is currently undergoing a strategic review of the business, which could conclude that the best course of action would be for the company to sell the business and reinvest the proceeds in is U.S. growth opportunities.  

Strong growth opportunities in the U.S.
Overall, Duke Energy plans to spend $3-4 billion each year on growth projects in the U.S.. This capital is expected to yield 4%-6% long-term earnings growth through 2016. That earnings growth is expected to trickle down to Duke Energy investors, as the company expects to grow its stock dividend even as it maintains a target payout ratio of 65%-70%. That should yield at least 2% annual growth in the company's dividend for many years to come. 

Beyond that Duke Energy sees the potential for steady earnings growth to continue. The company announced in 2014 that it could invest up to $2 billion on the Atlantic Coast Pipeline to supply natural gas to the company's Carolina's operating region by 2018. The increased supply of natural gas that the project will deliver should allow Duke Energy to consume even more cheap natural gas at its power plants in the region, as well as build additional future natural gas powered plants, as it further shifts away from coal. This would yield additional earnings and dividend growth for Duke Energy.

Final thoughts
To summarize, Duke Energy offers investors several fairly compelling reasons to buy its stock. Not only is it the nation's largest utility, but its earnings are now more secure while still growing in the future. As you can see on the slide below, the company offers a lot to investors, including scale, diversity, and a secure dividend:

Source: Duke Energy Investor Presentation

The bottom line here is that while Duke Energy might not be the fastest growing utility, it does offer slow and steady growth. Slow and steady, as you know, is what wins the investing race and is what makes Duke Energy's stock a solid choice for your investing dollars. 

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The smartest investors know that dividend stocks like Duke Energy simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here.

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  • Report this Comment On October 07, 2014, at 12:56 AM, prginww wrote:

    I'd stay away from all utilities. The "utility death spiral" is a real thing. It won't bankrupt them but it will hurt them.

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