Utilities tend to make excellent income stocks. That's because these companies generate relatively consistent earnings by supplying electricity and natural gas to consumers. With little need for that cash flow, they can return the bulk of it to investors. As a result, most utilities pay an above average dividend.

While there are dozens of publicly traded utilities in the U.S. to choose from, the four largest by market cap are NextEra Energy (NYSE:NEE), Duke Energy (NYSE:DUK), Southern Company (NYSE:SO), and Dominion Energy (NYSE:D). Given their large-scale operations, these companies have a lower risk profile than smaller utilities, which is why it makes sense to focus our attention on these four main players to find the best dividend stock in the sector.

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Good income now and even more later

Despite their large size, all four of these companies expect to grow their earnings and lucrative dividends at or above the industry average of 5% annually over the next several years:


Current Yield

Earnings Growth Forecast

Dividend Growth Forecast

Duke Energy


4% to 6% annually through 2021

4% to 6% annual dividend growth

Dominion Energy


8%+ annually through 2020 with 5% thereafter

10% through 2020

NextEra Energy


6% to 8% annually through 2020

12% to 14% through 2018

Southern Company


5% annually

5% annually

Data Source: Duke Energy, Dominion Energy, NextEra Energy, and Southern Company. Current yield as of Jan. 15. 2018.

That said, as that chart shows, Dominion offers investors the fastest growing dividend, which at a 10% annual clip through 2020, is nearly double the pace of Duke and Southern Company. To put that faster growth rate into perspective, here's what these stocks would yield in 2020 if they meet the mid-point of their dividend growth expectations:


Projected 2020 Yield

Dividend Growth Assumptions

Duke Energy


5% annual growth through 2020

Dominion Energy


10% annual growth through 2020

NextEra Energy


A 13% increase in 2018 and 7% annual increases in 2019 and 2020

Southern Company


5% annual growth through 2020

Data Source: Duke Energy, Dominion Energy, NextEra Energy, and Southern Company, with calculations by author.

As that table shows, Dominion's faster-growing payout would enable investors who buy today to collect a 5.4% yield on that investment in 2020, which would be higher than all but Southern Company. While that might make it seem like Southern Company is the better dividend stock, the yield is only part of the equation.

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Don't overlook the growth rate

All too often dividend-focused investors only seem to care about a stock's current yield. However, that payout only supplies a portion of their total return on investment. More often than not, a greater percentage of an investors' return comes from an increase in the company's value due to earnings growth, with stocks tending to rise alongside earnings.

This factor is where Dominion rises above the competition since it expects to grow earnings at a more than 8% annual clip through 2020, which leads its peer group. One of the drivers of that forecast is the company's recently announced plans to acquire rival utility SCANA Corporation (NYSE:SCG). That deal, if completed, would increase Dominion's earnings growth rate from its current forecast of 6% to 8% annually through 2020, up to more than 8% per year over that timeframe. Driving that acceleration is the fact that Dominion is buying SCANA for a low price due to that utility's recent struggles, which will enable the transaction to boost Dominion's bottom line immediately.

That higher-end growth rate, however, should help Dominion generate higher total returns for investors over the next few years. For example, by adding the dividend yield to its earnings growth rate, Dominion would produce a 12% total annual return. For comparison's sake, the total return potential of both Duke and NextEra Energy would be in the range of 8% to 10% annually while Southern's would be about 10% annually.

The total (return) package

While Dominion doesn't offer investors the highest dividend yield in its peer group, it still has the best dividend overall. That's because the company expects to increase that payout and grow its earnings by peer-leading rates through 2020. That faster-growing income stream increases the odds that Dominion can generate returns that should beat both its peer group and the market in the coming years, making it the top option in the sector to consider owning for the long-haul. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.