Long-Term Utility Dividends

By Arthur Pinkasovitch | May 13, 2010 AAA

Utility companies provide a wide variety of needed services ranging from natural gas transmission and sales to generating and distributing electric services to residential and retail customers. Firms operating in this industry are typically considered low risk, trade at low multiples, pay high dividends and generate a high level of cash flow. While the average dividend yield of the S&P 500 stands at around 1.63%, the utility sector yields 2.90%. Furthermore, with an industry beta of only 0.17, these companies are much safer than the broader index. Since the recent fluctuations of the Dow Jones are a major cause of worry for the risk adverse investor, nonvolatile dividend paying stocks should be viewed as an appropriate alternative.

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Utility Dividends

Company Dividend Yield
Spectra Energy (NYSE:SE) 4.70%
Williams Companies (NYSE:WMB) 2.50%
Southern Company (NYSE:SO) 5.40%
Duke Energy (NYSE:DUK) 5.80%
American Electric Power (NYSE:AEP) 5.30%
Exelon Corporation (NYSE:EXC) 5.10%
Dominion Resources (NYSE:D) 4.50%

Going Green
Utility companies are placing a major focus on long term sustainability by introducing greener business models. Duke Energy is working with Cisco to create a more efficient smart grid. This promises to have benefits of more reliable services for the consumer, better monitoring of economic conditions of supply and demand for the company, and, of course, a cleaner environment. Exelon Corporation aims to reduce their carbon footprint through continued cooperation with the U.S. Environmental Protection Agency. Exelon has reduced their green house emissions by 38% compared to 2001 levels, surpassing their intended goal by 30%. While going green seems to be the underlying intent of the major firms, none take it as seriously as Southern Company. The company has invested billions into such endeavors as carbon capture emission reduction, research and development and environmental stewardship, in addition to making recent headway in nuclear and solar energy.

Despite this push, coal is still the primary fuel utilized for energy generation by many, with nuclear, hydro and wind sources contributing to only a small percentage. Regulatory changes have spurred the movement towards environmental and efficiency requirements, but the transition is far from over. Dominion Resources recently announced that they intend to move forward with Mitsubishi's Advanced Pressurized Water Reactor as other firms also seek to broaden their alternative fuel capacity. Nuclear power constitutes approximately 20% of US electricity generation.

Dividend Consistency
Because the major players in this sector not only focus on quarterly profits but also long-term viability, utility stocks will reward investors with dividends for years to come. American Electric Power, for example, has paid dividends to shareholders for nearly a century - and intends to continue such policies while maintaining a 50-60% target payout ratio.

Bottom Line
Critics often argue that dividends are only paid by firms which have failed to find profit enhancing capital budgeting projects. However, this is simply not true for the utility corporations. They maintain dividend yield well above the index average and continue to endorse environmentally sound projects which will pay long term dividends to the firms and their respective shareholders. (For additional stock analysis, refer to Dow's Biggest Losers When It Tanked.)

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