I added Southern Company (SO -1.56%) and Dominion Energy (D -1.02%) to my portfolio a few years ago. Both are large utilities and, at the time I bought them, each had a historically high yield. I'm pleased with Southern, but Dominion Energy made big changes that I'm worried about. So I've been looking for a replacement, which I finally found in Black Hills (BKH -0.63%).
Here's why I pulled the trigger on the dividend-producing utility stock.
Black Hills is dedicated to dividends
One reason I chose Southern was its long history of dividend increases, now up to more than two decades. Dominion's history wasn't as strong, but it had a higher dividend growth rate, and management was projecting dividend growth would remain high. Then Dominion changed gears and dividend growth slowed to a crawl. And then it sold its pipeline business and cut the dividend.
Black Hills bests both of those stories.
Image source: Getty Images.
Black Hills is a Dividend King, which means that it increased its dividend annually for more than 50 consecutive years (technically 53). And while dividend growth isn't exactly huge, over the past one-, three-, five-, and 10-year periods it has averaged roughly 5%. That's better than the 3% or so average growth from Southern (and clearly better than a dividend cut). The reason I own utilities is to add some boring, but stable, dividend stocks to my portfolio. Black Hills is, in my opinion, a step up from Dominion and at the very least on equal footing with Southern.
Black Hills is a steady performer
One of the problems with Dominion, which I still own (for now), is that it has changed direction multiple times. Each time it changed it hinted strongly that it was now on the right track, but clearly wasn't. In fact, after the sale of the pipeline business, management promised that dividend growth was a key focus. Until it wasn't (the company went back to the drawing board again in 2022).
Black Hills, by contrast, has a long-term target of 4% to 6% earnings growth with no set end date. The "big" change in 2023 is that it is going to spend a little less on capital investments so it can strengthen its balance sheet. The plan is to boost spending in 2024 to make up for this year's shortfall and, thereafter, fall back into a more normal spending pattern. I read that as management having a preference for keeping things fairly constant over time without resorting to drastic moves. This is what I want from a utility.
Black Hills operates in advantaged markets
One of the things I like about Southern is that it operates in a lot of states that are seeing in-migration. More people means more customers and that means more revenue. Customer growth in Black Hills' core markets is roughly twice that of the U.S. average population growth.
In other words, Black Hills' utility operations in Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming are advantaged relative to other areas. That gives me confidence that the company can continue to achieve its long-term earnings growth goals. And it will be a nice compliment to larger Southern and its advantaged markets.
Black Hills is out of favor at the moment
I was well aware of the first three points but I didn't hit the buy button on Black Hills until recently. The reason for my change of heart was the dividend yield, which I use as a rough gauge of valuation. Over the past decade, the utility's dividend yield has spiked above 4% only a couple of times. Today it hovers around 4.2%. Historically the yield has been higher (notably so during the Great Recession), but I think this is at least a fair entry point for a reliable dividend stock.
There are a couple of reasons for the yield spike. For starters, Wall Street seems to be worried that the reduction in capital spending in 2023 is a problem. Given the history, it is likely to be a temporary problem if it is one at all. The second issue is the rise in interest rates, which makes safer income options, like a CD or bond, more competitive with high-yield stocks like Black Hills. The problem is that CDs and bonds don't offer reliable dividend growth. I'll happily buy a growing dividend while other people switch to CDs and bonds.
The core of the story
There are other nuances to my decision to buy Black Hills, which is likely to lead me to eventually sell Dominion, but the four points above are the highlights. Black Hills is a relatively small and less followed utility compared to Southern and Dominion, but it has a strong business and an incredible track record of returning value to investors. That is exactly what I am looking for. It is basically meant to be a boring cornerstone investment so I can be more aggressive elsewhere in my portfolio. Dominion has let me down, given the history there, but I am hopeful that Black Hills will not.
