Too many investors shun boring stocks, particularly if their biggest allure is slow and steady dividend growth. That pretty much describes utilities like Duke Energy Corporation (DUK +0.54%), Dominion Energy, Inc. (D +0.65%), and PPL Corporation (PPL +0.27%). However, with all three offering yields that are more than twice what you can get from an S&P 500 Index fund and sporting solid prospects for continued (albeit slow) dividend growth no matter what happens in the stock market, they might provide the diversification you need as the broader market averages hit fresh all-time highs. Here's why you can count on these three dividend stocks, even if the market pulls back.
1. Executing well today
Duke Energy's image took a hit not too long ago when it backed away from plans to build a nuclear power plant and a clean coal power plant it was constructing didn't go as smoothly as expected. However, it's past those issues, and has been working to reshape its business around the regulated and long-term contracted operations that are its core today. That process included jettisoning carbon-based merchant power assets, building a contract-based renewable power business, and buying Piedmont Natural Gas to add an additional avenue for long-term growth to the utility's portfolio.
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Today the company has plans to spend $37 billion dollars between 2018 and 2022 across its core electric, natural gas, and renewable power businesses to upgrade systems, improve services, and build new utility assets. With around 95% of that spending going toward regulated assets, the company looks set to boost earnings and dividends by its targeted 4% to 6% a year no matter what happens in the stock market.
How can I be so confident about this? Regulated utilities like Duke make a trade off: They get their rates approved by regulators in exchange for monopolies in the areas they serve. Since most of the company's planned spending is on things that will benefit customers (and in many cases are vital to maintaining the quality of Duke's service), rate hikes are highly likely to be approved without any problem.
Duke yields around 4.5% today, which is nice. I'll freely admit that 4% to 6% earnings and dividend growth may not be exciting compared to the tech stocks that are leading the market higher, but a little slow and steady growth can be a healthy addition to your portfolio -- just in case the market hits a rough patch.
2. Moving parts
Another utility that's worth a deep dive for similar reasons is Dominion Energy. The company has plans to spend around $4.2 billion a year on its regulated and long-term contract-based businesses in the electric and natural gas spaces over the next few years. It expects that spending to support 6% to 8% earnings growth through 2020. Dividends, meanwhile, are projected to increase by 6% to 10% each year through 2020.
Dominion hasn't had construction problems to speak of, but it currently faces an even more troubling issue: funding. A steep plunge in the unit price of the company's controlled limited partnership, Dominion Energy Midstream Partners, L.P., has removed a key funding source. Dominion had planned to sell assets to the LP to raise cash, but it simply can't do that right now. That's left it scrambling to line up the money needed to pay for all of its spending plans. The giant utility is planning to bridge the gap with non-core asset sales, and it's adding increased leverage at subsidiaries that would have been sold to the LP.
D Dividend Yield (TTM) data by YCharts
Concerns about its ability to get the needed cash have pushed the yield up to 4.7%. But as long as the company can muddle through this issue, which looks likely, the projected earnings and dividend growth appear well secured.
One other issue to monitor here, however, is Dominion's plan to buy smaller rival SCANA Corporation. This opportunistic deal will help to boost growth if its gets approved, but shouldn't have much of an impact if it falls through. All in, Dominion's high yield and solid, though slow, growth outlook could provide a nice backstop for your portfolio if the market tumbles.
3. Expanding the energy landscape
Next up is PPL, which is somewhat unique in that it owns utility assets in both the United States and the United Kingdom. That geographic diversity has some investors concerned about the overall business, noting that currency fluctuations can make earnings volatile. It also has to contend with regulations in two countries instead of just one. But the energy industry is shifting quickly around the globe, and even oil companies dipping their toes into the electricity space. Having exposure to more regions may actually be a net positive.
The other issue facing PPL is that it is highly reliant on dirty carbon fuels for the generation of electricity. That means that the utility has a lot of capital spending to do to shift its business in a cleaner direction. It has plans to spend around $15.5 billion between 2018 and 2022, which it projects will support 5% to 6% annual earnings growth.
And since a good portion of the spending plan is earmarked for the shift away from coal power plants, it's highly likely that PPL gets the rate hikes it is expecting no matter what happens in the stock market. The one drawback here is that the dividend should grow a little more slowly than earnings, with recent growth of about 4%. With a yield of 5.5%, however, investors can afford the slow dividend growth in exchange for the highly predictable business they are getting.
The market will correct
Trees don't grow to the sky, and stock markets don't go up forever. Eventually, the broader indexes will start to fall and, perhaps steeply. The time to prepare is before the correction starts, because after prices begin to fall it will be too late. The dividend yields and growth prospects offered by Duke, Dominion, and PPL are foundations that you can look to even during the tough times that are inevitably to come.
