4 utility favorites for dividend growth

These stocks have solid prospects for buy-and-hold investors seeking increased gains and income.

By TheStockAdvisors Jul 29, 2013 8:59AM

Power station © mimmopellicola.com, Flickr, Getty ImagesBy David Dittman, Personal Finance

Our investing approach is long-term focus. Our buy-hold-sell decisions are rooted in what underlying operating and financial metrics say about dividend sustainability and growth well into the future. Here's a look at four solid companies with sustainable and growing dividends.

Dominion Resources (D) is one of the largest producers and transporters of energy in the U.S., with a portfolio of approximately 27,500 megawatts of generation, 11,000 miles of natural gas transmission, gathering and storage pipeline and 6,300 miles of electric transmission lines.

Dominion has been a reliable power provider, operating in the stable regulatory environment of Virginia. Key to its long-term growth prospects as power demand flat-lines is the Cove Point LNG lique­faction plant, which is on the short list for approval of exports to non-free trade countries by the U.S. Department of Energy.

A drop-down of this asset into a master limited partnership could unlock significant value for Dominion shareholders. The company's share price has bounced back from a late-spring selloff. Dominion Resources is a buy on dips to $55.

Exelon Corp. (EXC) had warned for months that a dividend cut was coming before it finally made the move in early 2013. The cash saved will help the company wait out a return to normalcy for wholesale power prices.

In addition, new rules on carbon emissions will help Exelon, which controls 20% of U.S. nuclear generating capacity.

Unlike the natural gas-fired power plants they compete with, Exelon's nukes have a record of stable opera­tions and fuel costs spanning decades. And they emit no carbon dioxide (CO2).

A tax on CO2 or tighter regulation of emissions would boost the cost of gas-fired power overnight. So will eventual export of North American liquefied natural gas, cou­pled with surging demand at home.

Power prices would also likely surge back to normal levels and give a significant lift to Exelon's margins on sales. Exelon is a buy under $35.

ONEOK (OKE) announced in mid-June 2013 that it would shut down its energy services segment sooner than expected.

ONEOK expects to record a non-cash write-down of about $75 million in the second quarter, due to the release of contracts for such sales. The company also expects pre-tax operating losses of $55 million in 2013 and $15 million in 2014.

But management expects the cash impact of the accelerated wind-down to be "slightly positive" overall in 2013 because the segment will forego the majority of its previously planned natural gas injections.

ONEOK expects "no change" to its three-year net income and dividend-growth forecast out to 2015, making this a proverbial "addition by subtraction" that will help the company focus on profitable operations. ONEOK is a buy under $50.

Southern Company (SO) remains ripe for picking by value-focused investors. Concerns about cost overruns at its Vogtle nuclear power plant project, as well as the implications of a new Department of Energy order to upgrade vents at existing nuclear plants have also weighed on sentiment toward Southern.

However, the utility operates amid an extremely favorable regulatory environment in its core Southeast territory. Southern Company is a buy under $45.

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