Are These 3 Dividend Plays Right for You?

If you're considering buying Southern Company, American Electric Power, or Duke Energy, here's what you should keep in mind.

Jun 17, 2014 at 12:18PM

Whether or not to buy utility stocks right now is no easy decision. On one side, proponents of utilities cite their steady profits backed by businesses that are virtually a matter of national security. In addition, their reliable earnings allow them to pay rock-solid dividends.

Indeed, many utilities like Southern Company (NYSE:SO), American Electric Power (NYSE:AEP), and Duke Energy (NYSE:DUK) sport dividend yields of nearly 5%, which goes a long way, especially in today's environment of historically low interest rates.

On the other hand, the last point may be cause for concern. Critics of investing in utility stocks say that as interest rates rise, shareholders will suffer from a double dose of pain. First, rising interest rates would incentivize investors to place their money elsewhere, which would cause share prices to fall to keep up with rising rates (since prices and yields are inversely related). Moreover, because the capital structure of utilities is generally debt-heavy, rising rates would make it costly to refinance this debt going forward, which would have a negative impact on earnings.

With all of this in mind, whether or not to buy utility stocks seems like a very difficult decision indeed. But really it's quite simple. It all boils down to your individual investment goals.

Pillars of stability
Southern Company posted flat earnings last year along with 3% growth in adjusted earnings. This allowed the company to give investors a nice 3% dividend increase in April.

American Electric Power grew its profits from core operations by 5% last year. Future growth is likely too, even with the potential impact of rising rates. Management maintains a long-term future target of 4%-6% earnings growth, driven by transmission growth, investment in its infrastructure, and cost cuts.

Likewise, Duke Energy shares a similar philosophy of modest growth and cost cuts to boost earnings. Duke's adjusted profits rose 1% last year. It realized synergies from its acquisition of Progress Energy. Like American Electric Power, Duke management expects to generate between 4%-6% growth in adjusted earnings per share each year through 2016. Further benefits from the merger, along with continued organic growth, should result in stable increases in revenue and profit.

Clearly, these companies aren't too worried about rising rates. Each company's steady performance allows it to maintain a very impressive track record of rewarding investors.

American Electric Power has paid uninterrupted dividends for more than 400 consecutive quarters. In fact, American Electric has a great track record of increasing its payout, which indicates its reliability. It gave investors two separate dividend increases just last year.

Duke Energy increased its dividend last year as well and has paid dividends for 88 straight years. This marks the 13th consecutive year of dividend bumps for Southern Company, which has paid a dividend for 266 consecutive quarters dating all the way back to 1948.

It's true that rising interest rates may cause short-term dips in stock prices, but it stands to reason that most investors don't buy utility stocks for their capital gains potential. Typically, most investors are in it for the dividends, which will keep rolling in even if rates rise from here. Consider their extremely long track records of paying dividends. You can be sure these periods encompassed all sorts of fluctuations in interest rates, but those payouts endured.

Buy utilities? It depends who you are
The bottom line is that while rising rates would have an impact on profits, these three utilities are well-run businesses that are more than capable of managing their capital structures effectively. While you shouldn't expect the share prices of Southern Company, American Electric Power, or Duke Energy to perform spectacularly in the face of rising interest rates, that shouldn't be your focus to begin with. If you're a growth investor, look elsewhere.

But for income investors, who presumably make up the bulk of those who buy utility stocks, those dividends should keep rolling in. Each of these three utilities yields between 4%-5%, which is far better than most fixed income securities. From that perspective, utilities will continue to do what they're supposed to do.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks 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 now.

 

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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers