Is Dominion Resources' Dividend Increase a Smart Move?

Source: Dominion Resources. 

Dominion Resources (NYSE: D  ) announced Tuesday that it is boosting its 2014 dividend by nearly 7%. While this might mean more cash in hand for immediate investors, let's dive deeper to see whether Dominion Resources is making the most of its money.

Dynamite dividend?
The Dominion Resources board of directors has spoken. For fiscal 2014, the utility will up its dividend to $2.40 per share, compared to $2.25 this year. In absolute terms, that represents a 6.7% increase over current numbers, a significant bump for investors.

But the move should hardly come as a surprise for long-term Dominion shareholders. Through thick and thin, the company has prided itself on following the "staircase model" of consistently upping its dividend over time.

D Dividend Chart

D Dividend data by YCharts.

Southern Company (NYSE: SO  ) and Duke Energy (NYSE: DUK  ) have also managed to step up their dividends again and again. Over the past five years, Southern Company has upped its dividend five times for a total 20.8% payout increase, while Duke Energy has increased its own distribution five times for a 13% improvement. Although Dominion Resources has bumped up its dividend only four times, the overall 28.6% increase beats out both Southern Company and Duke Energy, and that's not including this latest announcement.

All dividends are not created equal
But a big dividend doesn't mean a thing if the company can't compete. Dividends are one of many ways a company can create value for shareholders, and freed-up finances can sometimes mean more for capital expenditures or acquisitions than distributions. Rejecting the staircase model, both Exelon Corporation (NYSE: EXC  ) and Atlantic Power (NYSE: AT  ) dropped their dividends drastically this year. Exelon Corporation cut its distribution by 40%, while Atlantic Power knocked off a whopping 66%.

The market moves for these five stocks is evidence enough that dividends aren't the only things that matter. While Dominion stock has soared 63% over the past five years, Duke Energy isn't far behind with 43%. And for those companies cutting dividends, Exelon stock's dip is minimal compared to Atlantic Power stock's price plummet.

D Chart

D data by YCharts.

That same stock price drop has allowed Atlantic Power's dividend to soar to 11.4%. The other companies' yields look a lot more stable, and reflect the fact that each utility has grown or compressed its yield in conjunction with its stock price. Dominion Resources currently has the lowest yield at 3.5%, but that has a lot to do with Dominion shares soaring in recent times.

D Dividend Yield (TTM) Chart

D Dividend Yield (TTM) data by YCharts.

Is Dominion's dividend dynamite?
For current shareholders, Dominion Resources' dividend increase is a good thing. The company has reaffirmed its dividend payout ratio of 65% to 70% of operating earnings, and its current operations support smart spending elsewhere.

"As Dominion continues building energy infrastructure to meet market and customer demand, we expect 80 percent to 90 percent of our future earnings to come from our regulated businesses," said Chairman, President, and CEO Thomas Farrell II in a statement. "This earnings mix should allow for continued strong growth in our dividend commensurate with our future operating earnings growth rate."

For prospective Dominion Resources investors, its stock price isn't cheap. The "staircase model" is quite the allure for income investors, but the market may have already priced in much of Dominion Resources' upside as it adds on natural gas and transmission projects.

Company

P/E Ratio, TTM

Price-to-Book

Exelon Corporation

15.0

1.10

Southern Company

21.9

1.89

Dominion Resources

60.4

3.27

Duke Energy

20.1

1.17

Atlantic Power

n/a (no earnings)

0.65

Source: Yahoo! Finance.

Big dividends with big returns
Dominion Resources' dividend increase is a smart move for current shareholders, but shopping investors might be better off elsewhere. The Motley Fool has searched long and hard for companies that offer both sustainable dividends and significant profit potential, and has identified the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


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