Many utility companies pay regular dividends, which is very attractive to investors. Utility stocks also trade with less volatility than stocks in other sectors, making them appropriate for more risk-averse investors. Duke Energy Corp. (NYSE: DUK), FirstEnergy Corp. (NYSE: FE) and Dominion Resources, Inc. (NYSE: D) are three of the best dividend stocks in the utility sector in terms of dividend yield, stability and future growth prospects.

Why Utility Stocks Are Attractive

Utility companies often have a great deal of debt since they require a large amount of expensive infrastructure to deliver utilities to their customers. Since it is so expensive to build this infrastructure, governments create restrictions as to who can build it. Utilities are essentially state-mandated monopolies. Competition is inefficient as communities do not need multiple infrastructures for the delivery of the same utility. For example, most communities do not need to be burdened with the infrastructure for more than one electric transmission service.

Consumers require utilities through all economic cycles. Even if the economy is bad, people still need electricity, heat and water. There is consistent demand for utilities. This makes future revenues relatively stable for utility companies to predict. Utility companies are therefore able to pay regular and stable dividends to their stockholders.

Utility companies are not risk-free. They are more sensitive to changes in interest rates due to their high debt loads. Changes in interest rates impact the costs of financing for utility companies. Utility stocks are defined as noncyclical.

Duke Energy

Duke distributes electrical power and natural gas and provides other energy-related services. As of September 2015, the company has a market cap of $47 billion and pays an annual dividend yield of 4.8%. It has a price-to-earnings (P/E) ratio of 17.45. Duke had operating revenues of $23.9 billion in 2014, with total assets of $120.7 billion. The company has paid quarterly cash dividends to stockholders for 88 consecutive years. Dividends do not get more stable than this history.

The company operates in three main segments: regulated utilities, international energy and commercial power. The regulated utilities division provides utility services mostly in the southeast United States. The company has 7.3 million electrical customers and 500,000 gas customers. The international energy sector manages power generation and distribution of natural gas mainly in Latin America. It also owns a 25% interest in the National Methanol Company in Saudi Arabia. The commercial power segment operates power plants and engages in the wholesale of electrical power, fuel and emission allowances. This segment also develops renewable energy projects. Duke has investments in 15 wind farms and 23 solar farms in 12 different states. It plans to add a substantial amount of solar power capacity in the next decade.

Revenues appear to be stable, and the company is poised for future growth with a projected growth rate of 4 to 6% in the future. It has a $42 billion capital investment plan through 2019. The plans for growth combined with a strong track record of paying quarterly dividends make the company a great dividend-paying stock.

FirstEnergy

FirstEnergy is a large diversified energy company with headquarters in Akron, Ohio. The company was created when Ohio Edison acquired Centerior Energy and its subsidiaries for around $1.7 billion in 1997. It is the largest investor-owned electrical system in the U.S., with a generating capacity of 17,000 megawatts.

The company pays an annual dividend of 4.61%, and as of September 2015, has a market cap of $13 billion. The dividend yield was cut in 2014 by 34.5%. While this dividend cut hurt investors at the time, the current dividend should be more sustainable going forward due to earnings per share (EPS) growth. The company’s shares average around 3 million in daily trading volume.

FirstEnergy has earned consistent annual revenues over the past few years, illustrating its stability. Revenues reached a high of $16 billion in 2011 but then fell off to $14.98 billion in 2012. Revenues stayed steady at $14.99 billion for 2014. The company’s main sources of energy are from coal and nuclear power. FirstEnergy has made investments in renewable energy, including a compressed-air electric generating plant in Norton, Ohio. While the drop in revenue after 2011 is somewhat concerning, the company’s consistency is still fairly strong.

Dominion Resources

Dominion is a power and energy company with its headquarters in Richmond, Virginia. It supplies energy to Virginia and North Carolina, while providing natural gas to West Virginia, Ohio, Pennsylvania and North Carolina. It operates a regulated interstate natural gas transmission line and a liquefied natural gas import and storage facility in Maryland. Overall, the company has a generating capacity of 24,600 megawatts, 12,200 miles of natural gas transmission lines and 6,455 miles of electric transmission lines.

As of September 2015, it has a market cap of $40 billion, with a dividend yield of 3.80%. Annual revenues have fallen over the past couple of years. The company had revenues of $14.6 billion in 2010. This fell to $12.95 billion by 2012, with revenues of $12.57 billion in 2014. Company shares average 3.2 million in daily volume. The shares have a low beta of 0.14 compared with the larger market. This shows the stock is less volatile than the stock indexes. Dominion predicts its earnings to grow around 6% annually.

The company entered into an agreement with SunEdison to sell 33% of its stakes in solar energy projects for $300 million in September 2015. The solar energy projects have a capacity of 425 megawatts. The agreement grants SunEdison an option to buy the remaining percentage in the projects in the future. The solar energy projects are in California, Connecticut and Georgia among other locations. Dominion will pay off debt with proceeds from the sale.

Dominion also spun off a master limited partnership (MLP) in 2014 called Dominion Midstream. The MLP included some of Dominion’s midstream assets and LNG services. The MLP offers significant tax benefits to investors, although they must deal with more complex tax filing requirements. The MLP is a significant avenue of growth for the company, and its tax benefits may allow the company to grow its dividend moving forward. Dominion is targeting an annual dividend growth rate of 8%. This commitment to dividend growth should also help support the share price moving forward as it is popular with income-oriented investors.

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