Bear markets are a test for investors, given that elevated levels of fear can lead to detrimental short-term thinking. The bear is still with us, but it's not too late to start thinking about the long term. Utility Dominion Energy (D 0.52%) is a good option for dividend growth-minded investors. Peer Consolidated Edison (ED 0.63%) is appropriate for investors who have a safety-first mentality.
The reset and back to growth
Dominion Energy cut its dividend in 2020 after selling a large chunk of its business (pipelines) to Berkshire Hathaway. It was the final step in the company's effort to shed its non-regulated business segments and become a wholly regulated utility business, not a result of the coronavirus pandemic. That timing was just a coincidence. Now, after the reset, the utility company is focused on investing in its assets to ensure system reliability. An effort that also helps it justify rate hikes to regulators.
The numbers are sizable, with a $37 billion capital investment plan over roughly the next five years. About 85% of that spending is for clean energy, and 75% should slide right into rates without having to get approved. In other words, there's a fair amount of clarity for the future at Dominion right now.
This is why management is so confident that it will be able to grow earnings by 6.5% a year through at least 2026. That may not sound like a huge number, but for a utility, that's pretty rapid growth. The dividend, meanwhile, is slated to expand at an annualized clip of 6% a year, trailing just behind earnings. Again, that may not sound huge, but it is a solid number for a utility. Notably, all of that spending should continue apace regardless of what is happening on Wall Street. Dividend growth investors looking to add a solid foundational investment to their portfolio should take a close look at Dominion.
2. As boring as boring gets
Utility Consolidated Edison is at the other end of the spectrum here, with nearly five decades of annual dividend increases behind it and a 10-year annualized dividend growth rate of a little less than 3%. This is a slow and steady dividend tortoise, but that may be OK with you if reliable dividends are what you seek.
A notable part of the puzzle here is that ConEd, as it is colloquially known, operates in and around New York City. (Dominion, by comparison, operates across 13 states.) The Big Apple is a major business center that has historically seen consistent demand and driven ConEd's slow and steady dividend growth. But the more notable story right now is that the electric and natural gas utility just passes through energy costs to customers. What backs its earnings are the costs associated with reliably transporting power. The ups and downs of the economy may impact electricity demand, but it doesn't change how much a customer pays each month to be hooked up to the grid. The cost of that goes up reliably as ConEd invests in its business.
Right now, ConEd has around $15 billion in spending planned over the next three years, including 2022. That's unlikely to lead to the kind of earnings and dividend growth that Dominion will put up, but it should still provide this tortoise with enough growth to keep its dividend streak alive. Which, for a conservative income investor focused on creating a reliable income stream, is what will probably be most important. ConEd is, at the end of the day, a boring cornerstone type of investment. It's the kind that will keep you safe in a bear market -- note that the stock is up 11% so far in 2022.
That price appreciation has pushed the stock to a premium valuation, so you will be paying full price for the dividend consistency here. But don't let the relative outperformance sour you on ConEd. If dividends and safety (there's no way to know when a bear market bottom has been reached) are important to you, you might want to consider adding it to your portfolio even at today's relatively dear prices.
Watch the passive income stream
Both Dominion and Consolidated Edison are interesting income options for different types of dividend investors. That said, both Dominion and ConEd are yielding a generous 3.4% or so today. That may not seem like a huge number, but when you compare it to the 1.5% dividend yield you'd get from an S&P 500 Index fund, well, you can see why these two utilities might be of interest today. And with no way to tell when this bear will end, both can add some important diversification to your portfolio, as well.
