5 high-yielding utility stocks
These unknown names are steady defensive picks, delivering dividends and low volatility in an unsteady market.
How much do you fear a stock market correction?
There are dire warnings, the latest from Bank of America Merrill Lynch analysts Stephen Suttmeier and Jue Xiong, who said earlier this week that the Nasdaq Composite Index ($COMPX) may have topped out following its recent rally heading into May, typically a weak month for stocks.
The tech-heavy Nasdaq is down 3 percent this year following gains of 38 percent in 2013 and 16 percent the year before. From its closing high March 5, the index has pulled back 7 percent.
But it's not only high-flying tech stocks. Mark Hulbert discussed the technical and seasonal aspects of the correction fears, the decisions of some investment advisers to "sell in April and go away" and possible tax implications. The benchmark S&P 500 Index ($SPX), which surged more than 30 percent in 2013, is little changed this year.
If you're a long-term investor with a 401k account, trying to time the market may not be worth the effort, since your subsequent investments during a correction are going in at lower prices.
If you're an active investor looking for defensive stocks, you might want to consider utility companies with high dividends. You’ll get lower volatility and dividends while you wait.
If you're an income-seeking investor, you already know how difficult it is finding investments amid historically low interest rates.
That's why we came up with two lists of high-yielding stocks by screening all U.S. and Canadian utility companies, using data provided by FactSet. All are publicly traded on U.S. exchanges.
The first list keeps things simple, by limiting stocks to corporate utilities with the highest dividend yields. The second list, which we’ll review next week, includes utilities registered as master limited partnerships, with the highest dividend yields.
The LPs tend to have higher yields, but they also involve extra work at tax time. Instead of receiving a 1099 DIV form with one number to enter on your tax form, the master limited partnership will send you a K1 form that will include many numbers, along with a complicated set of instructions. The big advantage of the limited partnerships is that the income "passes through" to investors, unlike corporations that are taxed before the dividends are paid out. For investors receiving their dividends from corporations, this is known as double taxation.
Here's the list of the five corporate utilities paying the highest dividend yields:
While these companies may not excite you, and the five-year total returns for all but one trail the 136 percent total return (with reinvested dividends) for the S&P 500, all of them showed smaller declines than the S&P 500's 37 percent plunge in 2008, which was the last down year for the index.
Here's a review of the five corporate utility stocks listed above:
Gas Natural (EGAS) of Mentor, Ohio, has seen its shares rocket 30 percent this year. Based on a monthly dividend of 4.5 cents, the shares have a dividend yield of 5.27 percent. The performance this year reflects strong revenue and earnings growth in 2013, with a 5 percent increase in the number of customers. The company’s 2013 earnings of 71 cents a share easily covered the dividend.
Shares of Pepco Holdings (POM) of Washington, D.C., have returned 13 percent this year, accelerating from 3 percent in 2013. Based on a quarterly payout of 27 cents, the shares have a dividend yield of 5.05 percent . The company reported a net loss for 2013 of $212 million, or 86 cents a share, because of losses associated with its strategic decision to wind down its retail energy supply business. The company got a piece of good news in February, when it arrived at an agreement with the Federal Energy Commission to recover $88 million in "abandonment costs related to the Mid-Atlantic Power Pathway (MAPP) project." That money will be recovered over a three-year period.
Investors will be looking for more improvement from Pepco, since the company's 2013 earnings from continuing operations totaled 45 cents a share, which didn't even cover half of the dividend payments. The company hopes to deliver just that, with earnings guidance for 2014 ranging from $1.12 a share to $1.27 a share.
Next on the list is Hawaiian Electric Industries (HE) of Honolulu. The stock is down 4 percent this year. Based on a quarterly dividend of 31 cents, the shares have a dividend yield of 5.01 percent. In addition to its main utility business, the company has a thrift subsidiary, American Savings Bank, FSB. The company earned $161.5 million, or $1.62 a share, in 2013, comfortably covering the dividend.
The fourth entry on our list of high-paying corporate utility stocks is TECO Energy (TE) of Tampa, Fla., which pays a quarterly dividend of 22 cents for a yield of 4.82 percent. The shares are up 7 percent this year, following a 5.5 percent return in 2013. Excluding costs of $6.2 million for a pending acquisition, earnings for 2013 were $204 million, or 95 cents a share, more than covering the dividend.
Last on the list is UIL Holdings (UIL) of New Haven, Conn. The company pays a quarterly dividend of 43.2 cents, for a yield of 4.64 percent. The stock is down 3 percent this year, following a negative 1.5 percent total return last year. The company earned $115.3 million, or $2.18 a share, in 2013, covering the dividend comfortably.
UIL Holdings in March agreed to acquire Philadelphia Gas Works for $1.86 billion in cash, in a deal UIL said would be "immediately accretive" to its cash flow, but would also be "initially earnings neutral and long-term earnings accretive." A Morgan Stanley (MS) subsidiary is providing a $1.9 billion credit facility to UIL Holdings to finance the acquisition. The deal is subject to the approval of Philadelphia and Pennsylvania officials, and is expected to be completed in the first quarter of 2015.
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Wait until interest rates go up. Then you will see a bloodbath in utilities.
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These companies won't soar like other plays in the sector, but they make for great income sources.
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