The market is at or near all-time highs, but it won't stay there forever. There will, eventually, be a bear market. The time to prepare for that is now, when you can think rationally and not act out of fear. That's why you should be looking at blue-chip utility stocks like Duke Energy Corporation (DUK 0.47%) and Dominion Energy, Inc. (D 0.16%). When the market turns, their high yields and well-defined spending plans will help you ride out the storm.
1. Big and boring
Duke Energy is one of the largest domestic electric and natural gas utilities, with a $56 billion market cap. The stock currently yields around 4.75%, more than twice the yield offered by an S&P 500 Index fund. The dividend has been increased every year for 14 consecutive years. At the end of the day, there's nothing particularly sexy about Duke Energy. But that's exactly why it is such a great stock -- it provides the basic necessities that fuel a modern society.
Image source: Getty Images.
As a utility with largely regulated assets, Duke also has well-defined spending and growth plans. That's because regulated utilities are granted a monopoly in exchange for government approval of rate increases -- Duke needs to prove that increases are warranted. The way Duke proves that is by spending money to upgrade its utility systems. This is spending that will take place regardless of what happens in the stock market, with the company's current plan calling for $37 billion of capital investment between 2018 and 2022.
Over 90% of the spending is going toward regulated assets, with the rest earmarked for fee-based businesses like midstream pipelines and renewable merchant power. Spending on the regulated side is going toward things like storm hardening, upgrading aging infrastructure, and building new, cleaner electric generating capacity. These are all things that regulators like to see, and they should support earnings growth of 4% to 6% through 2022, with similar growth in the dividend. That's growth that should take place no matter what's going on in the broader market.
2. A full plate
Dominion Energy is also a large, diversified utility with a focus on electric and natural gas. Its market cap is around $46 billion. The yield is roughly 4.8%, and the dividend has been increased annually for 15 consecutive years. While Dominion's core business is boring, it's got a little more going on than Duke right now.
The utility plans to spend roughly $11.4 billion between 2019 and 2021 on its core operations. That includes regulator-favored investments in things like upgrading the grid, building renewable power assets, and replacing old natural gas pipelines. That's expected to support 6% to 8% earnings growth. Dividends are projected to grow by at least 6% a year over the span. This story is very similar to Duke, since that spending is going to be needed regardless of what's going on in the broader market.
DUK Dividend Per Share (Quarterly) data by YCharts
What differentiates Dominion is that it has taken a more aggressive approach to growth. For example, it recently offered to buy financially troubled, smaller rival SCANA Corp. If approved, this could push earnings above the high end of the projected range. The utility also just completed the Cove Point liquefied natural gas (LNG) export facility, one of the first LNG export facilities to get up and running in this country.
Management is clearly willing to take some risks. But not every investment has panned out as hoped for Dominion, including the company's use of a controlled limited partnership to raise capital. It is now buying back that partnership -- and resorting to selling noncore assets and adding debt to Cove Point -- to support its long-term spending plans. Dominion is doing a fine job of adjusting its financing plans, but there's a little more uncertainty here relative to Duke. The compensation is its higher expected earnings and dividend growth rates.
Do your research now
Blue chip utilities like Duke and Dominion are generally pretty boring companies, which remains true despite Dominion's merger and acquisition activity. They aren't the types of stocks you talk about at cocktail parties, at least not when the market is at or near all-time highs. You brag about owning utilities when the market is faltering, which is going to happen at some point. Before it does, and fear is the driving force in the stock market, you should take the time to look at Duke and Dominion. Slow and steady, with clearly defined spending and growth plans, could be highly desirable attributes sooner than you may think.
