Historically, utilities have been viewed as partial substitutes for fixed-income securities and hedges against inflation, because they typically enjoy stable free cash flows and pay out a large portion of their earnings as dividends. Utilities usually underperform in terms of their returns when interest rates rise. While the U.S. Federal Reserve raised the federal funds rate by 0.25% in 2015, it remains uncertain if the U.S. economy will remain robust into 2016, warranting more and steeper interest rate increases. In light of this, income-seeking investors have many compelling options in the utilities sector with companies that have strong balance sheets and steady cash flows to afford paying dividends.
BCE Inc. (NYSE: BCE) is the largest communication company in Canada, providing residential and business customers with wireline and wireless communication services, including satellite communication, direct-to-home television and Internet access. Bell Canada enjoys a strong competitive advantage due to the scale of its operations and shrewd capital allocation. The company has a strong position in the wireless market in Canada with only other two competitors, Rogers and Telus, able to match the scale of its operations.
Bell Canada is carefully managing its main challenge of shrinking fixed-line revenues by investing in fiber optics for Internet connection. Bell Canada derives its revenues in Canadian dollars, and foreign currency fluctuations can cause volatility in returns when translated to U.S. dollars. As of January 2015, the company has a 4.8% dividend yield.
AES Corporation (NYSE: AES) is a diversified utilities company with operations throughout the world. AES owns and operates numerous power plants and electricity grids for producing and distributing electric power to end-user consumers. AES has greatly simplified its business by exiting numerous markets. It still has a presence in over 15 countries with large exposure to emerging markets, which could prove a challenge to the company's returns. Foreign currencies greatly depreciated against the U.S. dollar, which weighed on AES's profit margin and earnings growth.
Presence in emerging markets may prove to be a boon, as developing countries are still growing and need more energy in comparison to the U.S. market. As of January 2015, AES has a 4.82% dividend yield.
Duke Energy Corporation (NYSE: DUK) is one of the oldest and largest utility companies in the United States that operates regulated utilities, international energy and commercial power businesses. Duke Energy conducts foreign operations primarily in Latin America. Regulated business provides a stable cash flow and is not subject to competition due to a natural monopoly status. Duke's management team, under the leadership of Lynn Good, has rightly concentrated its attention on regulated business and continues investing its power infrastructure in regulated utility areas.
In 2015, Duke Energy acquired Piedmont Natural Gas for $4.9 billion with assumption of $1.8 billion of debt. Duke Energy must integrate this company into its operations and justify the high premium it paid on this acquisition. Other risks of investing in Duke Energy include increasing energy efficiency and potentially slower economic growth in the United States. As of January 2015, the company has a dividend yield of 4.6%.
CenterPoint Energy Inc. (NYSE: CNP) is a public utility company with a large presence in Texas. The company's operations are heavily concentrated in Houston, where the company operates as a regulated utility. Houston historically has been one of the fastest-growing cities in Texas with increasing electricity consumption. CenterPoint Energy made substantial infrastructure improvements in its markets, which result in further efficiencies and better growth prospects.
In addition to providing utility services, CenterPoint Energy owns interstate pipelines and various energy-related businesses that showed signs of weakness in light of the recent oil price decline. This could prove to be a major risk for the company and will contribute somewhat to the volatility of CenterPoint Energy's earnings until energy prices stabilize. As of January 2015, the company has a 5.62% dividend yield.