One of the largest utilities in the United States, Dominion Energy (D 0.44%) is currently offering investors a very attractive 4.6% dividend yield. That's 1.8 percentage points higher than the average utility, as measured by Vanguard Utilities Index ETF, and about 2.6 percentage points higher than an S&P 500 Index fund. But a high yield isn't enough to make Dominion a great dividend stock. Here's a deeper look at Dominion to help you figure out if it belongs in your dividend portfolio.

A little history

As a utility, Dominion is underpinned by a government-regulated monopoly. Essentially, it provides lots of customers with things -- electricity and natural gas -- that they can't really live without. The government gets to control the rates it can charge, but there is always a solid underlying demand, and the rates it has been allowed to charge have, historically, been fair. The rest of its business is largely tied to utility assets, too. They include things like midstream pipelines (which are meant to serve utilities) and renewable power assets (in which the power gets sold under long-term, fee-based contracts to utilities). In total, roughly 95% of its operating income is highly reliable.   

A man with blueprints and high voltage power lines behind him

Image source: Getty Images.

This wasn't always the case. For example, Dominion once produced oil and natural gas as well. That's a much more volatile sector, prone to dramatic ups and downs. Over the past decade or two it has materially changed its business, looking to become increasingly more conservative and utility-like. What makes this so interesting is that the utility managed this transition without cutting its dividend. In fact, Dominion has increased its dividend annually for 16 consecutive years at this point. There are utilities with longer streaks, but few that have managed such a dramatic corporate makeover while still ensuring to reward investors with a growing dividend. 

From this perspective, Dominion has some serious street cred. However, there are some negatives here that need to be looked at before calling this utility a great dividend stock.

It's not all good news

For example, Dominion's leverage is toward the high end of its closest peers. Its debt-to-EBITDA ratio of 6.6 sits well above that of NextEra Energy's (NEE 0.88%) 3.7 and is also notably higher than Duke Energy's (DUK -0.19%) 5.3. Dominion's ability to cover its interest costs is also relatively weak, with just 1.7 times coverage of trailing-12-month interest expenses. Duke, Southern Company (SO 0.24%), and NextEra all covered their interest expenses at least two times over. Leverage is one reason Dominion's yield is higher than its closest peers. The company has plans to deal with this, but plans aren't enough -- it needs to lower its leverage before an all-clear can be called. 

Another concern is Dominion's payout ratio, which is projected to be close to 90% in 2019 based on the company's full-year projections. The average for similar utilities is closer to 70%. Although Southern and Duke are also over the average, investors are keenly aware of the risk of such a high payout ratio. So is Dominion, however, and it is taking steps to bring that number down. And that's yet another mark against the utility. After a couple of material annual dividend increases, Dominion has decided to slow dividend growth down into the low single digits until the payout ratio is back in the 70% range. This is a good call, but investors aren't too happy that it will leave the dividend growing at the rate of inflation, or perhaps even lower, for a spell. 

And then there's the big construction projects. Dominion has successfully completed a few key projects, notably including the Cove Point liquefied natural gas export facility. But it has had a harder time getting its Atlantic Coast pipeline built. This project is facing material environmental pushback, it's delayed and over budget, and a key legal holdup is now set to be played out in front of the Supreme Court. Dominion says it is confident it will get the pipeline built, but a positive outcome is far from clear at this point. It also just announced plans to build an offshore wind farm that comes with a roughly $8 billion price tag. So there's some sizable construction risk here that isn't going away. This wouldn't be as big a deal if the balance sheet were in better shape. 

D Chart

D data by YCharts

Dominion's stock price has, perhaps understandably, lagged the broader utility group, up just 13% so far in 2019, compared with a gain of 17% for the Vanguard Utilities Index ETF. The only major peer that's done worse is Duke, with Southern and NextEra up roughly 40% and 30%, respectively. So investors looking for a value play might find something they like here. But the stock is trading near an all-time high even though the dividend yield is near its highest levels since the turn of the century. Key valuation metrics don't help clear the picture up, either, with some measures, like price to sales, suggesting overvaluation and others -- price to book value and price to cash flow -- hinting at undervaluation. 

Is it great or not?

Add all of this up, and it's hard to call Dominion a great dividend stock today. If the dividend were more secure, perhaps. Or if the dividend growth rate were more robust, maybe. Or if the valuation were deeply discounted, sure. But right now Dominion doesn't really stand out in any material way other than a relatively high yield. That's not enough to call it a great dividend stock. For investors willing to take on the uncertainty of Dominion's plans to further strengthen its business, notably reducing leverage and lowering its payout ratio, it might be worth owning. But for truly conservative investors, there will probably be too many risks, elevated leverage and the Atlantic Coast pipeline being prime examples.