______________________________________________________________________________________________________________________________

Wed. Feb. 25, 2009

Utilities For A Well-Rounded Dividend Investment Portfolio *

A well-rounded dividend investment portfolio just doesn’t happen by accident. As noted in Charlie Munger’s 10 Rules for Investment Success,  “Allocate assets wisely: Proper allocation of capital is an investor’s No. 1 job.” It is human nature to want to jump on the what’s hot bandwagon and ignore what is considered boring, like utilities.

Long considered the domain for “widows and orphans”, utilities have developed a somewhat stodgy reputation.  Why are utilities considered good for widows and orphans? Here a few reasons:

  1. They are generally less volatile than the market as a whole (low beta)
  2. Their products are something that people continue to need and use no matter what the economy is doing, thus
  3. Their dividends tend to be more stable and secure

Utilities would be the perfect dividend income investment, except for one thing – they tend to have low dividend growth rates. As such, you wouldn’t want a whole portfolio of utilities and you need to be very selective in which utilities are added, and when they are purchased. In my personal allocation, utilities are limited to a maximum of 10% of my portfolio (currently, they make up 3.7% of my total investment portfolio).

In addition to the regular buy criteria, I look for a higher yield when buying utilities, generally greater than 5.5%, but I really prefer around 6%.  This eliminates many utilities, but there are still several from my Stock Ideas page that might be worth an additional look. Here is a list of all the utilities that have paid a dividend for more than 25 years and have a yield of 5.5% or greater:

Vectren Corp. (VVC) – 6.23% Yield
This energy holding company, headquartered in Evansville, IN, provides natural gas and electric energy to more than one million customers in Indiana and Ohio. It also offers energy related products and services to customers throughout the Midwest and Southeast. It has increased its dividend for 49 consecutive years. It last increased its dividend in November 2008.

Consolidated Edison (ED) – 6.29% yield
This electric and gas utility holding company serves parts of New York, New Jersey and Pennsylvania. With its February 2009 dividend increase, ED has now increased its dividend for the last 36 consecutive years. (most recent analysis)

Otter Tail Corp. (OTTR) – 6.35% yield
The company produces, distributes and sells electric energy in Minnesota, North Dakota and South Dakota and has interests in health services, manufacturing and other businesses. OTTR missed is normal dividend increase in February 2009. Instead, the company left its dividend flat with 2008. The last time OTTR increased its dividend was February 2008.

Integrys Energy Group (TEG) – 7.27% yield
This utility holding company serves about 485,000 regulated electric and 1,674,000 regulated gas customers. The company also operates an unregulated energy supply and services business. With its February 2009 dividend increase, TEG has now increased its dividend for the last 51 consecutive years. (most recent analysis)

Black Hills Corp. (BKH) – 7.48% yield
This diversified South Dakota-based holding company encompasses electric utility and integrated energy businesses. With its February 2009 dividend increase, BHK has now increased its dividend for the last 40 consecutive years. Prior to this last increase, the company went five quarter with no increase dating back to November 2007.

Of the five utilities listed above, I would not consider OTTR until the future dividend direction can be determined.  BKH’s late increase is a little concerning, but I could not disqualify it at this time.  I own and am currently purchasing  TEG and ED as their valuations and my allocations allow.

Finally, looking at current and some historic returns over shorter periods of time, certain utilities have done quite well. Remember, there is a reason the widows and orphans own them.

Full disclosure: Long ED, TEG


14 Responses to “Utilities For A Well-Rounded Dividend Investment Portfolio *”

  1. D4L: I like ED and TEG too. I have been waiting for TEG to come down. Early this week, I initiated the position. Any particular reason, why you prefer 6% from utilities?

  2. Interesting list. I am a holder of ED. In my analysis of many utility dividend achievers I have discovered that utilities typically increase dividends in cycles and then abruptly cut them, only to increase them again.
    Apart from this however, most retirees like them for the high current yield

  3. Dividend Tree: I prefer 6% from utilities due to their slow dividend growth. I too recently added to my position in TEG. Looking at their earnings release we may have been too early. :)

    DGI: I use utilities as a surrogate bond.

    Best Wishes,
    D4L

  4. D4L: yeah i may have been little early. With projected 2009 EPS of $2.51 to $2.66, it would be interesting to see how TEG maintains it current dividend. Management also wants to keep payout ratio around 60-65%. So is the dividend cut on its way sometime this year?

  5. Red Dog says:

    Great timing. Day before Teg sinks 26%. Always wait till after earnings.

  6. Red Dog says:

    I own some TEG and ED. Loved them but maybe we are entering a bad period for utilities.

    The next bomb will be the “O bomb a”. They will be attacking utilities with a vengeance for their carbon footprint. Is there a list of utilities that would be least affected by the administration’s attack on coal produced energy? I noticed that its rather difficult to ascertain how deep a utility is into coal by looking at their yearly reports. Its like pulling teeth.

  7. Poor in MO says:

    You got your wish. TEG has fallen 25%. With Obama and power hunger Dems, I wouldn’t trust the otherwise safe utility industry either. Probably going to nationalize all utilities so the poor can heat their houses to 80 degrees. Worked so well in eastern Europe, until someone had to pay for it all.

  8. kewgardens says:

    TEG just blew up today. Projects lowered FY 2009 earnings of only $2.51-$2.66, which is below what is necessary to cover their (recently enhanced!?) $2.72 dividend.

    What are your thoughts on TEG now? Is today an overreaction? Is the dividend safe? How much might it be reduced?

    And how could the Board have increased the dividend just two weeks below this earnings report?

  9. kewgardens says:

    By the way, would you recommend increasing one’s position in TEG given today’s drop? If TEG reduces its dividend to $1.68 (65% payout of estimated $2.58 earnings, it would yield approximately 6.1% at current (discounted) prices.

  10. All: I am working on a followup post to what happened to TEG. There are some interesting observations to made, and obviously lessons to be learned.

    Best Wishes,
    D4L

  11. Chuck says:

    What is your feeling about Duke and Dominion going forward?

  12. Chuck: I looked at Duke some time back and was under-whelmed. I have not looked at Dominion.

    Best, Wishes,
    D4L

  13. Monevator says:

    Here in the UK, utilities have become very expensive relative to the market, as measured by yield. I’d certainly still have one in a dividend portfolio, but there’s a lot of solid companies now offering more comparable yields that have a better shot at growing over the long-term.

    Great list from Munger! I’m going to link to it. :)

Trackbacks/Pingbacks

  1. Best Finance and Investing Articles February 2009 | Darwin's Finance