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High-Yielding Utilities Worth Your Time

http://www.fool.com/investing/general/2011/05/05/high-yielding-utilities-worth-your-time.aspx

Rex Moore
May 5, 2011

The power of dividend investing is pretty well known these days. Higher-yielding stocks tend to offer higher returns over time than low- or no-yield stocks do, according to research from Jeremy Siegel and others. In fact, the 20 best-performing survivor stocks from the original S&P 500 in 1957 are all dividend payers.

What's more, reinvesting dividends acts as a "bear-market protector and return accelerator," according to Siegel. The extra shares purchased and accumulated at higher dividend yields during down periods act as a protector in falling markets, and these extra shares turn into a "return accelerator" when prices rise.

As the recent economic crisis illustrated all too well, however, you can't buy just any high-yielding stock. Dividends that get cut or suspended entirely can wreak havoc on a stock price -- and thus, your portfolio.

Fortunately, there are steps you can take to lessen your chances of buying one of these train wrecks. James Early, advisor of our Motley Fool Income Investor service, suggests looking at the payout ratio, for starters. That's simply the percentage of net income a company uses to pay its dividend. Obviously, the higher the payout ratio, the tougher it is for a company to meet its dividend obligation. James looks for a payout ratio less than 80% for safer companies and a sub-60% or even sub-50% payout for risky companies.

To further stack the odds on your side, you can limit your search to companies that have grown their dividend over the past three years or so. That eliminates the less stable or erratic dividend payers.

I constructed a screen to find some promising high-yield, low-risk utilities for further research. I made sure the stocks met the following criteria:

  • Market cap > $1 billion.
  • Payout ratio < 60%.
  • Three-year dividend growth > 0%.
  • Utilities sector, as defined by Capital IQ.

Here are the top 10 highest yielders the screen produced.   

Company

Market Cap
(in Millions)

Payout Ratio

3-Year Cumulative
Dividend Growth

Dividend Yield

Exelon (NYSE: EXC  )

$27,681

54%

19%

5.0%

Entergy (NYSE: ETR  )

$12,338

48%

26%

4.8%

Avista (NYSE: AVA  )

$1,403

60%

63%

4.5%

DPL (NYSE: DPL  )

$3,541

48%

16%

4.4%

DTE Energy

$8,652

57%

3%

4.4%

AGL Resources (NYSE: AGL  )

$3,260

57%