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3 High-Yield Utility Stocks

By Tyler Crowe, Matthew DiLallo, and Sean O'Reilly - Updated Oct 30, 2017 at 6:13PM

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Want some large dividend stocks you don't have to worry about? Check out Southern Company, Sempra Energy, and Dominion Energy.

Perhaps one of the most dependable portions of the stock market to find high-yielding dividend stocks is in the utility industry. The regulated nature of their business means their revenue and cash flows are quite reliable. If you want stocks to supplement your income, utilities are a great place to start.

We asked three of our investing contributors to each highlight a stock in the utility industry that looks like a great high-yield investment today. Here's why they picked Southern Company (SO 0.92%), Sempra Energy (SRE 1.11%), and Dominion Energy (D 0.76%)

Power line towers at sunset

Image source: Getty Images.

Adapting to a changing world with ease

Sean O'Reilly (Southern Company): The utility sector is in the midst of a once-in-a-generation shift. Utilities, a go-to industry for dividend investors, is being forced to adapt to a world that demands cleaner forms of energy. That means increased use of cleaner fossil fuels and renewables to power our world. It won't be cheap. Money once earmarked for dividends is being invested in these new energy sources. One company that is managing this shift extraordinarily well, and my pick for the high-yield utility to buy today, is Southern Company.

Southern Company, which currently sports a 4.5% dividend yield, is one of the largest utilities in the United States. It possesses over 46,000 MW of generating capacity and over 9 million customers. It provides electricity to consumers through more than 200,000 miles of electric transmission lines. Southern Company is also diving headfirst into a greener future. In his 2016 annual letter, CEO Thomas Fanning that committed to "playing offense" and embracing the future of energy production. This means less coal and more fuel sources like natural gas (which produces about 50% fewer carbon emissions than coal). Southern Company made a long-term commitment to natural gas usage with last year's approximately $8 billion acquisition of EGL resources (now Southern Company Gas). It is also seeking to complete construction of two nuclear power reactors in Georgia. Once completed in 2022, they will be the first brought on line since 1979.

With a nearly 5% dividend yield and a focus on the future, Southern company is a must-buy for any utility investor.

Decent dividend yield with huge growth ahead

Tyler Crowe (Sempra Energy): Sempra Energy may not be the highest-yielding utility stock out there, but its 2.8% yield at current prices outpaces the S&P 500's aggregate yield of 1.8% rather easily. Compared to the other companies in this group, Sempra's yield doesn't look that appetizing. That is, until you look at the growth prospects of the company.

Sempra has several components to its business that provides both the stable cash flows you would expect from a utility and the growth opportunities from investments in international markets and in the booming LNG industry. According to management, investors can expect dividend growth of 8%-9% for the next couple of years and potentially more when its Cameron LNG facility comes on line. 

Sempra's current utilities -- San Diego Gas & Electric and CoCalGas -- are regulated electric and gas utilities that have fixed rates of return on equity. These two businesses currently represent about two-thirds of the company's annual earnings and provide a reliable cash flow to support its dividend and spending for its other business lines.

The large opportunities Sempra has in the works come from its infrastructure business segment, which includes its equity investment in Mexican energy company IEnova, its renewable power assets, and its Cameron LNG terminal currently under construction. IEnova's asset base, for example, has more than doubled since its IPO back in 2013 after winning several contract awards for various energy projects across Mexico. Sempra also has additional plans to expand its current Cameron export facility from three liquefaction trains to five, convert its current LNG import terminal in Mexico to an export terminal, and another greenfield LNG terminal in Port Arthur, Texas.

If all of these projects come to fruition, then Sempra should be able to easily replicate its best-in-class dividend growth for several years. You may be getting a slightly lower yield today than some other stocks, but it may be well worth it in the long run. 

Stepping on the gas

Matt DiLallo (Dominion Energy): One of the sacrifices investors typically make when investing in a higher-yielding entity like a utility is growth. However, that's not the case with Dominion Energy. While the electric and gas company offers income seekers the high yield they desire given its current 3.8% payout, it takes things a step further by also boasting visible growth prospects.

Thanks to several in-process expansion projects, Dominion Energy expects to grow its earnings by a 6% to 8% compound annual growth rate from 2017 to 2020 with at least 5% yearly growth after 2020. That increasing profitability, when combined with the estimated $7 billion to $8 billion in cash distributions Dominion expects to receive from its master limited partnership, Dominion Energy Midstream Partners, positions the company to deliver best-in-class dividend growth of 10% annually from 2017 to 2020. That's an acceleration from the 8% annual growth rate it has produced since 2014 and well ahead of the 5% annual average of its peers. 

Dominion Energy's faster growth rate isn't something income seekers should overlook. That's because they stand to collect a much more substantial income stream in a couple of years than if they invested in a slower-growing competitor with a similar current yield. Furthermore, they have the potential to earn a higher total annual return, which is the yield plus the growth rate. That ability to make more money over the long term is why yield seekers should take a closer look at Dominion.

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Stocks Mentioned

Dominion Resources, Inc. Stock Quote
Dominion Resources, Inc.
$80.03 (0.76%) $0.60
The Southern Company Stock Quote
The Southern Company
$71.47 (0.92%) $0.65
Sempra Energy Stock Quote
Sempra Energy
$147.46 (1.11%) $1.61

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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