As the United States approaches its debt-ceiling limit and markets exhibit soaring volatility, investors are once again realizing the value of slow-and-steady investing. The Dow Jones Industrial Average seems to make 100-point swings in either direction on a daily basis, which makes for a great deal of stress for cautious investors.
That's why, in times like these, the reliable nature of utilities makes stocks like American Electric Power (NYSE:AEP), Consolidated Edison (NYSE:ED), and FirstEnergy (NYSE:FE) so valuable. Their investors don't have to worry whether the collective foolishness -- notice the lowercase "f" -- of our lawmakers will bring their businesses to the brink. Utilities provide products that are essential to our society and operate within a tightly regulated industry. Even when the economy takes a nose dive, households still need electricity, and these stocks retain the ability to keep their generous payouts flowing.
Power up your portfolio's income
Utilities are often derided for their lack of strong growth, which is true. Electricity doesn't exactly represent the sexy new investing concept, and you're not likely to see a great deal of time in the financial media devoted to the wealth-building power of utility dividends. When markets roar higher, it's easy for utility stocks to get left behind.
At the same time, when uncertainty rears its ugly head, it's plain to see how valuable rock-solid utilities can be. Their consistent profits and juicy dividend yields are especially valuable when markets tumble. Consider that, even in this environment of low interest rates, American Electric Power, Consolidated Edison, and FirstEnergy each provide dividend yields that stand 200 basis points (or greater) above the yield on the 10-Year Treasury Bond.
Plus, whereas many high-yielding stocks only provide huge payouts as a result of collapsing share prices and questionable futures, most utility dividends are powered by stable profits.
American Electric Power pays a 4.5% dividend and distributes 79% of its profits to shareholders. As a result, these companies have struck a good balance between providing shareholders with meaningful yield, but also leaving some room for future dividend growth. For its part, Consolidated Edison carries a 4.4% dividend yield and a payout ratio of 72%, again signifying a company that is treating its shareholders fairly while still maintaining comfortable financial flexibility.
In fact, both American Electric Power and Consolidated Edison have great track records of rewarding shareholders with dividend growth. American Electric recently declared its 413th consecutive quarterly common stock cash dividend, and has paid a dividend to its shareholders every quarter since July 1910. In addition, Consolidated Edison earlier this year raised its dividend for the 39th consecutive year.
With a nearly 6% yield that's an even greater payout than most other utilities, FirstEnergy ranks as a premier source of income. At the same time, FirstEnergy has a heightened risk profile, which likely explains its higher dividend than most of its peers.
FirstEnergy pays a $2.20 per-share dividend, but the company only earned $1.85 per share last year. It's worth noting that the company's profits have exceeded its dividend as recently as 2011, but the fact that it pays such a high dividend means there's little room for the dividend to grow. Indeed, FirstEnergy hasn't provided its investors with a dividend increase since 2008. Nevertheless, for investors more concerned with current income, such as those in or nearing retirement, the company's payout looks secure.
Ignore D.C. drama with utility dividends
If you've grown weary of nervously watching news headlines for cues on when the market might make its next downturn, then you should consider utility stocks. These represent rock-solid business models that pay great dividends to help you sleep well at night. And while it's true that growth from these utilities will probably never take your breath away, there's something to be said for reliability. In an environment when markets keep breaking new highs and interest rates remain near historic lows, safe 4% to 5% yields are extremely valuable.
As a result, if you're hoping to add a dose of stability to your portfolio, then you should seriously consider American Electric Power, Consolidated Edison, or FirstEnergy.
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Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.
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