There are plenty of ways for a company to allocate its earnings. Some choose to reinvest most of their profits back into the business. Others repurchase their stock or pay dividends. No matter the strategy, the goal is to create value for investors.
Dividend stocks can be particularly attractive if you are looking to supplement your income in retirement or want an additional steady stream of income to bolster your finances at any stage of life. PepsiCo (PEP 3.07%) is a well-known stodgy dividend stock with a market-beating 3.2% yield. During the past 12 months, it has paid a whopping $7 billion in dividends. It has also raised its payout annually for more than 50 consecutive years -- making it a Dividend King.
Utility giant Southern Company (SO +1.11%) has raised its payout every year since 2002, but has a 76-year track record of never cutting it. And, it has paid more than $3 billion in dividends over the last 12 months. With a yield of 3.5%, here's why Southern Company is a dividend stock worth considering now.
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An integrated giant
Southern Company's business is primarily concentrated in the Southeastern U.S. Its traditional electric operating companies -- Alabama Power, Georgia Power, and Mississippi Power -- provide the bulk of its revenue and earnings. Southern Company Gas is its natural gas distribution and utility segment, while Southern Power operates wind, solar, and natural gas generation facilities, most of them in the Southwest, South Central, and Southeastern U.S.
The utility achieved a major milestone in the first quarter, when it announced that Unit 4 of its massive Vogtle Electric Generating Plant in Waynesboro, Georgia, had entered commercial operation. Unit 3 of that four-unit nuclear power plant came online in July 2023. Units 1 and 2 entered operation in the late 1980s.
Combined, the plant now has 4.8 gigawatts (GW) of generating capacity, making it the largest clean energy plant in the U.S. For context, the entire generating capacity of Southern Power is 13 GW across 55 facilities.
A path to higher cash flows
Southern Company has a balanced portfolio across natural gas, nuclear, wind, and solar. That's a different approach than a company like NextEra Energy (NEE +2.35%) -- the most valuable U.S.-based utility by market cap -- which has built one of the world's largest renewable power companies, mainly in wind and solar.
Southern Company's capital expenditures steadily climbed as it worked to get projects off the ground. But now that its major projects are operational, expenditures could level off -- leading to higher cash flow and earnings.
Vogtle represented a $10 billion investment in Georgia, which is more than Southern Company has ever spent on capital expenditures in a single year. According to its Vogtle Nuclear Brochure, it estimates that "the incremental cost to complete the facility presents more than $3 billion in savings for customers compared to natural gas combined-cycle generation."
In sum, the utility giant is expanding its power-generation portfolio with sources that help its customers save money.
Southern Company is a great value
Southern Company trades at a reasonable valuation for such a steady performer. Its price-to-earnings ratio currently sits at 21.2, which is right around its average level during the past three to 10 years.
SO PE Ratio data by YCharts.
Analysts' average estimates call for earnings per share of $4.01 in 2024 and $4.32 in 2025.
Steady, high-single-digit percentage growth isn't usually something to get excited about. But Southern Company has stable inflows thanks to long-term contracts and power purchase agreements. Predictable earnings growth helps fuel its growing dividend.
Southern Company's yield is solid, but it is at the low end of its 10-year range because the stock has been such a strong performer. It has crushed the average performance of the utility sector during the past one-, three-, five-, and 10-year periods. Clearly, its business model is working. And with a diversified portfolio of projects and a reliable customer base, there's every reason to think Southern Company will maintain its consistency.
A passive income powerhouse
Southern Company doesn't have the glitz and glam of a high-flying growth stock. But it is arguably one of the safest utility stocks -- and one of the safest dividend-paying stocks in general. It has a track record of financing and developing fossil fuel and renewable energy projects, making it a balanced play on the country's future energy needs.
Add it all up, and Southern Company looks like a simple yet effective way to boost your passive income stream for years, if not decades, to come.
