Find Out How Duke Energy Can Power Your Portfolio

Investors who desire strong income and steady profits should consider a well-run utility like Duke Energy.

Feb 19, 2014 at 10:49AM

Utility stocks are very popular among certain types of investors, such as those in or nearing retirement. There's good reason for this, since utilities are relied upon as providers of dependable profits and steady dividends. One of the biggest arguments for investing in utility stocks is that they can continue to generate reliable earnings, due to the fact that their services are essential for society. No matter how the broader economy swings, utilities will go about their usual business day in and day out.

That's the main takeaway when it comes to Duke Energy (NYSE:DUK), after releasing its full-year results. While utilities aren't the flashy, hot new investing idea, they can still provide a valuable dose of stability.

Slow and steady wins the race
Duke Energy posted adjusted earnings per share of $4.35 in 2013, which hit the middle of its forecast range. This represented fractional growth of less than 1%.

Slow and steady is typical of most well-run utilities, like American Electric Power (NYSE:AEP) and Southern Company (NYSE:SO). American Electric's operating earnings rose 4.5% last year. This performance was right in-line with management's long-term growth target. Southern Company posted flat earnings last year along with 3% growth in underlying earnings.

American Electric Power plans to produce long-term earnings growth of 4% to 6% over the next several years. This will be achieved by organic growth, as well as investment in utility infrastructure and cost reductions. Duke Energy holds the same exact expectations for itself. Management expects the company to achieve 4% to 6% earnings growth through 2016.

What 2014 has in store
Due to the steady nature of their underlying business, utilities typically hit their earnings projections. It's likely that the upcoming year is no exception. Each utility should see favorable rate outcomes that will allow for modest growth. This allows utilities to keep paying their hefty dividends.

Duke Energy, American Electric Power, and Southern Company will use a significant portion of their cash flow this year to pay dividends, as they have done for many years. In addition, they have long track records of raising their dividends. Each company raised its dividend last year. In fact, American Electric Power increased its dividend twice.

One item for Duke Energy investors to keep in mind going forward is the company's intention to sell 13 power plants worth $2 billion, according to analyst estimates. These plants, which are located in the Midwest, are for sale after Ohio rejected the company's request for higher rates. Wholesale power prices declined last year, which prompted Duke to consider selling the assets.

Duke Energy management states that their merchant power plants are too volatile, making them a poor strategic fit for the company's intended risk profile. Fortunately for investors, Duke Energy believes the sale would increase earnings per share. While the company hasn't specified how it will use the funds generated from the sale, it's likely they can find suitable opportunities to pay down debt or acquire additional assets. Investors should keep tabs on the sale in the months ahead.

The Foolish bottom line
Utilities can provide a necessary dose of stability to your portfolio. Electricity is something people will use regardless of the current economic environment, and as a result, these stocks will keep profits and dividends flowing to investors for many years to come. That's what allows for Duke Energy, American Electric Power, and Southern Company to generate such reliable returns year in and year out, no matter the condition of the broader economy.

Utility stocks aren't perfectly suitable for all investors. Those who need steady, current income should seriously consider utility stocks. Investors with longer time horizons would likely find better growth opportunities elsewhere. But for any investor looking for reliable profits and safe 4% to 5% dividend yields, utilities serve a valuable purpose.

Looking for yield outside of the utility sector?

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Southern Company. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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