Utilities are often great options for income investors. That's because these entities typically generate stable cash flow by providing recurring services to customers such as distributing electricity and natural gas to homes and businesses. With a minimal need for the excess cash those services generate, these companies are free to return a significant portion to investors by way of lucrative dividends.
Three high-yielding utilities that caught our eye are National Grid (NGG 0.92%), Brookfield Infrastructure Partners (BIP -0.52%), and 8Point3 Energy Partners (CAFD). Here's why our Foolish investors think income-seeking investors should take a closer look at this trio.
Avoiding the pitfalls of power generation
Tyler Crowe (National Grid): It's not that often you can find a company that can ensure a steady rate of return. National Grid is one of the closest things you can find to a stock that will grow like clockwork. Unlike most regulated utilities that have power and transmission lines, National Grid focuses almost exclusively on the transmission side of the electrical business. It also has a significant natural gas transmission and distribution system that delivers gas to residential and commercial customers in the U.K.
Recently, National Grid sold a considerable part of its gas distribution business to a consortium of companies. The goal of the sale was to monetize part of a business that's one of the lowest-growth market segments while also getting some of the steady cash that business provides. The most attractive place for National Grid to deploy its capital is in the U.S., where there's a greater need for investment and the regulatory environment gives greater rewards for reliability improvements.
By no means is National Grid ever going to be a fast-growing stock. Investors will see a big one-time boost from the sale of its natural gas distribution business, but dividend growth has always been slow and steady. With the company's stock offering a yield of 4.6% and the stock trading at 15 times earnings, National Grid looks like a solid income investment.
A high-yield utility, and then some
Matt DiLallo (Brookfield Infrastructure Partners): Global infrastructure giant Brookfield Infrastructure Partners operates a diversified portfolio of businesses, including several utilities. In fact, 47% of the company's earnings come from utility-like assets, which provides it with a stable base of cash flow. The company typically returns 60% to 70% of that money to investors each year, which currently adds up to a high yield of 4%.
Brookfield Infrastructure Partners aims to organically grow that payout by a 5% to 9% annual rate. Powering that growth is a combination of factors, including inflation-linked contracts, higher volumes as the global economy expands, and growth projects it has in development. In fact, the company has $2.4 billion of expansion projects under way that should enter service over the next few years, with $1.1 billion of that capital to be spent on growing its utilities segment. However, one of the benefits of Brookfield's diversification is that it has other avenues to drive growth, including $1 billion of transportation projects and several hundred million of projects in its energy and communications segments.
In addition to its visible organic growth profile, Brookfield Infrastructure Partners has a knack for buying businesses at discounted prices that drive accelerated growth, which is what it recently did after acquiring a major natural gas transmission utility in Brazil. Overall, the company has grown earnings and payout by a 24% and 12% compound annual rate, respectively, since its formation thanks in part to smart acquisitions. Given that the company currently has a robust M&A pipeline and ample liquidity, it has the potential to continue growing at an accelerated rate in the future. Brookfield Infrastructure Partners therefore offers investors a fast growing opportunity to lock in a high yield in the utilities sector.
A special situation with some risk but limited downside
Jason Hall (8Point3 Energy Partners): 8Point3 Energy Partners doesn't provide electricity or water or natural gas directly to the consumer. But the master limited partnership, which owns utility-scale solar power projects and sells the output to utility and commercial/industrial users, is the kind of energy producer that's becoming more and more important to the way the world is powered. And with a dividend yield of 7.4% at recent prices, dividend investors should give it a close look.
There is some concern over 8Point3's future. Co-sponsor First Solar has said it wants to sell, while SunPower is keeping its options open. But either way, this uncertainty has kept 8Point3's share price down -- and, conversely, its yield up.
What makes this worth buying now? In short, there seems to be limited downside risk that the partnership will be sold for less than its current share price, while the upside is twofold. First, if a buyer were to take 8Point3 private or roll it into an existing public company, it's incredibly likely to be at a premium to the current price. Second, if a buyer kept it public and simply took control from First Solar and SunPower, the payout strategy would almost certainly remain in place, and long-term dividend growth would be a certainty.