Utility companies are popular companies to invest in. This is because they pay regular dividends. Furthermore, their volatility is much lower than in other stocks. But which utility dividend stocks should you choose? While they have fewer risks, there are still some risks to contend with. You need to consider, therefore, future growth prospects, stability, and dividend yield.
Why Do People Buy Utility Dividend Stocks?
Usually, a utility company has a huge amount of debt. This is because of the infrastructure they need to build and maintain in order to offer their services to their clients. Because the cost of building this infrastructure is so high, the government has put restrictions on who is and isn’t allowed to build it. As such, a utility company is actually a monopoly, albeit a state-mandated one.
Through every economic cycle, consumers will require utilities. Even in a poor economy, people require water, heat, and electricity. As such, demand for utilities is always consistent and actually growing. Hence, it is quite easy to predict stable future revenues for utility companies. As a result, despite high debt, these companies can pay their stockholders stable and regular dividends.
Measuring Risk:
That said, utility dividend stocks aren’t completely free from risk. For one, they are one of the most sensitive stocks when it comes to interest rates, because utility companies have such high amounts of debt. If there is a change in interest rate, utility companies will instantly see that their financing cost is significantly impacted. That said, the stocks remain noncyclical.
A Focus on Duke Energy:
One of the most popular utility companies for dividend stocks is Duke Energy. They distribute natural gas and electric power, as well as offer other services related to energy. In September 2015, their market cap was $47 billion. Their annual dividend yield is quite high at 4.8% and the price-to-earnings (P/E) ratio is 17.45. In 2014, their operating revenues were $23.9 billion and their assets were worth a total of $120.7 billion. For the past 88 years, they have consistently paid quarterly cash dividends to all their stock holders. As such, they are very stable and will not likely get any better than that.
Duke Energy cont’d:
Duke Energy operates in commercial power, international energy, and regulated utilities. The latter provides most of the utility services in the South East of this country. They currently have 7.3 million customers for their electricity, as well as half a million for gas. In international energy, they distribute natural gas and manage power generation in Latin America. Furthermore, they own a quarter of the Saudi Arabian firm National Methanol Company. For their commercial power, the company offers wholesale emission, fuel, and electrical power allowances. They also develop a lot of renewable energy, investing in 23 solar farms and 15 wind farms in some 12 states across the country. They are also committed to expanding this.
Duke Energy is just one example of why it pays to invest in dividend stocks with utility companies. Yes, there is still some risk, but it is minimal. The only downside is that they payout is usually lower than those of high risk investments.
