With the 10-year U.S. Treasury yield hovering around 3%, income investors might be inclined to buy dividend stocks with better yields. Not just that, you might also prefer high-quality stocks that grow their dividends consistently in order to support the high yields.
In other words, you need dividend growth stocks yielding well above 3% today to provide you a steady stream of cash that can leave you with extra income after covering inflation. For a risk-averse investor, Duke Energy (DUK 0.77%) is the perfect stock to consider now. More aggressive investors can check out STAG Industrial (STAG -1.86%).
Top dividend utility stock for low-risk income investors
Utilities are known for their dividend-paying capabilities -- the regulated and contracted nature of the business generates steady cash flows for the companies that are then passed on to shareholders in the form of dividends. I recommend you look at Duke Energy, yielding a hefty 4.7% now.
To start, Duke Energy is one the largest electricity and natural gas utilities in the U.S., with an electricity customer base of nearly 7.6 million and a gas customer base of 1.6 million. As of Dec. 31, 2017, Duke owned 49,500 megawatts of electricity generation capacity. The size and scale of its business means Duke also has greater spending capacity on infrastructure, which can prove to be an advantage in securing rate hikes from regulatory authorities. A regulated utility can increase its rates only if approved by regulators.
Image source: Getty Images.
Duke's growth plans look well-placed as well. It plans to spend $25 billion on modernizing its grid, and $11 billion on natural gas and renewable energy. By 2030, Duke hopes to bring down the share of coal in its fuel output to only 16% while expanding natural gas's share to 42% from only 26% in 2017.
The company believes its clean energy efforts and incoming rate hikes should comfortably help it grow earnings per share and dividends by 4% to 6% annually through 2022. That's higher than the rate at which Duke's dividends have grown in recent years, which means it should not only mean bigger dividend checks for you year after year, but also support the stock's yield at around 4%. That makes Duke one of the top utility dividend growth stocks -- and a particularly attractive play at its current high yield.
Interested in e-commerce? Check out this 5% dividend stock
STAG Industrial is a real-estate investment trust (REIT), which means it's required to pass on at least 90% of its taxable income to shareholders in the form of dividends. That explains STAG's strong dividend track record: The company has increased its dividend every year since 2011, growing it at an annual compound rate of nearly 5.6% in the past five years. The company switched to monthly dividends payments in 2013.
So, what does STAG really do to offer that kind of a steady dividend growth? It acquires and operates industrial properties like warehouses, distribution centers, and light manufacturing facilities, most of which are single-tenant buildings. If a property fetches high returns, STAG is open to selling it to reinvest the proceeds opportunistically in other mispriced assets. This proactive addition and rotation of assets has earned STAG strong returns over the years, as evidenced by the steady growth in its funds from operations and dividends.
STAG Funds from Operations (TTM) data by YCharts.
To be fair, large exposure to industrials makes STAG's cash flows vulnerable to business cycles, but the company's diversification mitigates risks to a great extent. First, STAG's tenants are spread across several sectors and industries within, the largest being capital goods, automobiles, materials, transportation, consumer durables, and food, beverage and tobacco. Second, its largest tenant, General Services Admin (a government agency), accounts for only around 2.5% of its rental revenue. In other words, STAG doesn't depend heavily on any one tenant; its revenues are spread out among 312 tenants.
In fact, STAG's line of business (warehouses) also makes it an indirect play on e-commerce, further adding to the stock's appeal. If you're willing to take some risks, STAG makes for a solid income play, especially with its high current yield of 5.1%.
