Utility stocks are often overlooked. Most consumers aren't familiar with many of them; their only interaction with a utility is when they pay their monthly water, gas, or electric bill.
But utilities tend to be excellent dividend stocks because of the industry's consistent and often regulated nature. They can pay shareholders passive income that increases every year, making utilities substantial additions to any long-term, diversified portfolio.
Here are three utility stocks that have proven to be resilient dividend stocks over the years.
Why are utilities good dividend stocks?
Utilities distribute essential resources like water, electricity, and gas to homes and businesses. Anyone who lives in their own house or apartment knows that paying your utility bills is as essential as buying groceries. Utilities typically don't have to worry about getting paid, regardless of the economy.
Governing bodies and utilities agree on rate hikes and pricing in exchange for commitments to invest in upgrading or maintaining utility infrastructure like pipes, meters, etc. Unregulated utilities will use long-term contracts, providing similar stability to the business.
Most utility stocks are slow and steady growers, but while their price appreciation may not lead your portfolio, they tend to pay large dividends that can produce strong total returns. In other words, utilities can give you the best of both worlds.
1. Consolidated Edison
Energy delivery company Consolidated Edison (ED 0.02%) operates utilities delivering electricity, gas, and steam energy to roughly 10 million people in the New York City and Westchester areas. The company also operates a green energy segment and transmissions business, including electricity and gas pipelines.
Consolidated Edison is one of the most accomplished dividend stocks in the utility sector; the company is already a Dividend Aristocrat and, with 48 consecutive payout increases, will soon be a Dividend King. Investors can enjoy a 3.3% yield at the current share price.
Over the next two years, the company plans to invest $15.7 billion, primarily into its utility business. It is considering selling its clean energy portfolio for roughly $4 billion to help fund the investments. These investments will bring rate hike requests to regulators, which should boost the company's growth over the coming years.
2. UGI Corporation
International energy distributor UGI Corporation (UGI -0.70%) has a collection of businesses, including natural gas and electric utilities, midstream energy operations, America's largest propane distribution business, and liquid petroleum distribution in Europe.
UGI isn't in the S&P 500, so it cannot qualify as a Dividend Aristocrat, but its 35 years of consecutive dividend growth speak volumes about the company's long-term history of success. The stock offers a dividend yield of nearly 3.5%, and management's long-term goal is to increase the payout by an average of 4% each year.
The company's U.S. propane business generated $138 million in net income in Q2 2022, making it UGI's largest reporting business segment by profit. However, the business is impacted by how much gas people use, which can fluctuate based on gas prices, or the weather each year, so the segment can be volatile at times. UGI's utility business helps add some stability to the overall business, making it easier to count on the dividend. Additionally, management takes a conservative approach to the payout, spending just 19% of the company's net income on the dividend.
3. Black Hills Corporation
A dedicated utility company, Black Hills Corporation (BKH 0.23%) distributes gas and electricity to 1.3 million people across eight midwestern states. You can see below how smooth the company's gross profit growth has been over the past decade, a result of being a pure utility business versus mixed models like Consolidated Edison and UGI.
Most investors probably won't be familiar with an obscure business like Black Hills, but the company has delivered, raising its dividend for 52 years. The stock is sporting a 3.2% dividend yield, and management targets a 5% annual growth rate and a 50% to 60% payout ratio for the dividend, making it a slow and steady payout that investors can rely on.
The company looks poised to continue delivering; management forecasts 5% to 7% annual earnings-per-share (EPS) growth through 2026 based on forecasted capital spending and rate hikes. The company's financial discipline makes the Black Hills a likely candidate to continue growing its payout well into the future.