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Will Natural Gas Destroy These Dividend Stocks?

By Justin Loiseau - Apr 16, 2013 at 8:35PM

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Coal's comeback could kill natural gas dividend stocks.

It was bound to happen: Natural gas prices are heading higher, and utilities that upped their investments over the last few years could be up the creek without a profitable paddle. Let's look at where prices are headed, who's got gas, and what secret dividend stocks could emerge ahead from the newest natural gas alternative.

Natural, but not cheap
Natural gas' heyday may be over. The Energy Information Administration released its Short-Term Energy Outlook report (link opens in PDF) this week, and high prices are pushing down demand for this alternative fuel. Natural gas fueled 30.4% of total electricity generation in 2012, but the EIA projects that amount to drop to 28% for 2013. That makes sense, considering 2013 Henry Hub natural gas prices are expected to clock in 28% above last year's $2.75 per MMBtu.

Source: EIA.gov. 

Atlantic Power's (AT) dividend recently received a haircut, and the utility is counting on natural gas to push its profits back into the black. With 58% of its 2012 generation capacity coming from natural gas, any price increase could have an adverse effect on the dividend stock's ability to balance its books.

Source: Atlantic Power 10-K. 

Exelon (EXC -0.42%) is getting battered on both sides by nuclear and natural gas critics. Although nuclear makes up 55% of the utility's total generation, natural gas' 28% contribution is hardly insignificant.

Source: Exelon Investor Relations Website 

But with a battered valuation pushing Exelon shares up 23% in the past three months, there could be plenty of growth opportunity to accompany this dividend stock's 6% yield.

Coal on the comeback?
With natural gas prices up, utilities are looking elsewhere for their fuel. The answer: renewables and coal. And while renewables demand is expected to bump up 3.4% for 2013, a 7.8% spike in demand could put coal users back in cost-competitive territory.

Teco Energy (NYSE: TE) takes the cake for vertically integrated coal. Not only does the utility use coal for its 4,400 MW electricity generation, but it also owns and operates mines capable of producing nine million tons of the black gold every year. The company's dividend has grown 10% in the past five years, and new sales could boost this dividend stock's offerings even higher.

Duke Energy CEO Jim Rogers recently criticized Southern's (SO 0.11%) sluggishness to modernize its fleets, but the utility's corporate foot-dragging puts it in a perfect position to profit from coal. The company counts on coal for 52% of its generation, but its work-in-progress portfolio also relies on oil and gas for 30% of its output.

American Electric Power (AEP 0.67%) is one of the largest utilities around, with a total generation capacity just shy of 38,000 MW. Coal clocks in at 66% of the company's total capacity, creating plenty of potential for cheap generation. But similar to Southern, 22% of the utility's generation originates from natural gas and oil. American's 3.8% dividend yield is the lowest of the bunch, but the dividend stock has pushed up its payouts 14.6% in the past five years.

Where to invest?
When it comes to picking dividend stocks, there's no secret recipe. Although Teco Energy investors are probably popping the bubbly while Atlantic investors cringe, a dynamic and diverse energy portfolio is the only true way to pull long-term profit. Be sure to check out my other article outlining four companies predicted to ride the renewables rise, and make your investment decisions accordingly.

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Stocks Mentioned

The Southern Company Stock Quote
The Southern Company
SO
$73.41 (0.11%) $0.08
Exelon Corporation Stock Quote
Exelon Corporation
EXC
$47.15 (-0.42%) $0.20
American Electric Power Company, Inc. Stock Quote
American Electric Power Company, Inc.
AEP
$99.70 (0.67%) $0.66
Atlantic Power Corporation Stock Quote
Atlantic Power Corporation
AT

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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