The foundation of most dividend portfolios is based on utilities. Utility companies often provide lower volatility in relation to the overall market while paying out a good portion of their earnings to shareholders in the form of a dividend. Most importantly, utility companies provide a product -- electricity, water, or gas -- that is an absolute necessity regardless of current economic conditions, making them a solid investment in a booming economy or in a recession.
The attraction to the electric utility sector is the plethora of delectable dividends. You can pretty safely invest in this sector and land a stable dividend. However, there are two companies in this sector that stand out above their peers and also one that I feel fails to make the cut.
One aspect you need to understand about electric utilities is you won't get any barn-burning growth, and Southern is evidence of this. The company's five-year projected growth rate of 5.5% might put most investors to sleep, but a 4% compounded annual growth rate in the company's dividend over the past five years is nothing to sneeze at. Aside from a special dividend in 2001, the company hasn't lowered its quarterly distribution in the past 29 years -- that's consistency.
Providing electricity throughout much of the Southeastern U.S. and competing against smaller rivals CenterPoint Energy
Hey, General Motors, you aren't the only show in town in Michigan! DTE Energy provides electric and natural gas services in Michigan and has an impeccable record of maintaining its dividend over the past 41 years without a drop in its quarterly distribution. Go ahead and scoff all you want at the company's 1.7% five-year compounded dividend growth rate -- you won't find a more stable dividend in the electric utility sector.
Currently yielding 4.5%, DTE Energy's yield doesn't seem spectacular next to competitors CMS Energy
OK, so Ormat isn't a traditional electric utility. The company operates in the geothermal and recovered energy business, so it's more of a pioneer of technology than an old-fashioned operator of electric grids. Just because Ormat is on the cutting edge of electrical generation doesn't give this company a free pass.
Ormat has committed the ultimate no-no in the electric utility sector: reducing its quarterly distribution. Sometimes this can be a forgivable offense, especially given the high yields often found in this sector, but not in Ormat's case. The company was only throwing peanuts at investors from the start, so imagine how shareholders must feel knowing their quarterly distribution has fallen from $0.12 in to $0.04 in just five quarters. Now yielding less than 1% and sporting a P/E ratio significantly higher than many of its peers, Ormat demonstrates that while it may be on the cutting edge of power generation, it has a long way to go before it earns the trust of dividend-seeking investors.
The electric utility sector is flooded with great choices and high yields. Always remember to take your time and dig deeper than just the current yield to see how a company has treated shareholders in the past -- that could be the difference between a good dividend and a great one.
What electric utility dividends are you holding? Share your ideas in the comments section below and consider adding Southern, DTE Energy, and Ormat Technologies to your watchlist to keep up on the latest in the electric utility sector.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Southern and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that focuses on generating and transmitting financial awareness.
More from The Motley Fool
In Your 70s? 2 Boring, High-Yield Stocks You Might Want to Buy
If you're in your eighth decade of life, preserving capital is just as important as income. Here are two companies that can help with that.
70 or Older? 2 Stocks You Should Consider Buying
Security and growing dividends are what this pair of high yielders offer.
4 Stocks With Embarrassingly Unsustainable Dividends
Payouts to shareholders of ExxonMobil, Royal Dutch Shell, Southern Company, and Six Flags Entertainment are out of balance with the state of their earnings.