During tumultuous market periods, such as the one that has taken over since the newest variant of Covid-19 was discovered, investors tend to flock to safety.
That can mean different things to different investors, but for dividend investors, the safety of reliable payouts can mean less volatility in one’s portfolio during periods of market weakness.
One area of the market that tends to perform well on a relative basis during periods of selling is utility stocks. In this article, we’ll take a look at how utilities can help investors navigate rough periods.
Utilities are sought after by investors for their predictability, recession resilience, lower volatility, and ability to pay steady — and growing — dividends over time. These characteristics are attractive under any circumstance, but when the market is volatile and stocks are making big moves in both directions, the relative calm of utilities can provide respite for investors.
In addition, from an income perspective, there are few sectors that are better than utilities. The group tends to see very stable and predictable cash flows, which then affords the companies the ability to return ever-growing amounts of cash to shareholders through dividends.
Any investor can find this trait to be valuable, particularly in terms of compounding those dividends over time, or using dividends to fund living expenses. Periods of market weakness can be taxing on an investor’s portfolio, but adding more stable stocks like utilities can help minimize overall portfolio volatility, while providing stable and growing income.
Their steady growth comes from the simple fact that people always need utility services such as electricity and gas, regardless of the state of the economy.
Now, let’s take a look at three utilities we like for safe and expanding payouts over time:
- Consolidated Edison (NYSE:ED)
- American Electric Power Company (NASDAQ:AEP)
- NextEra Energy (NYSE:NEE)
Utility Stocks: Consolidated Edison (ED)
Dividend Yield: 3.94%
Our first stock is Consolidated Edison, a regulated electric, gas, and steam utility based in New York. The company boasts more than 10 million customers in New York and New Jersey, and generates about $12 billion in annual revenue, so it is quite large for a utility. Its track record is outstanding as well, tracing its roots back to 1823, and raising its dividend for an impressive 47 consecutive years. In terms of longevity, it is difficult to beat Consolidated Edison.
The company has boosted its dividend by a relatively modest 2.6% on average per year in the past decade, but for a utility that already has nearly five decades of dividend increases under its belt, it is unreasonable to expect huge dividend raises every year. What it does have is a 3.94% current yield and a payout ratio of just 92.24%, which is more than acceptable for a utility. Therefore, we see Consolidated Edison’s dividend yield as attractive — given it is three times that of the S&P 500 — but it is also very safe and should continue to grow for many years to come.
American Electric Power Company (AEP)
Dividend Yield: 3.84%
Next up is American Electric Power Company, an electric utility that engages in the generation, transmission, and distribution of electricity to retail and wholesale customers in the U.S. American Electric uses a wide variety of energy generation methods, including coal, natural gas, nuclear, hydroelectric, solar, wind, and others.
American Electric traces its origins back to 1906, and sports a 16-year dividend increase streak. It produces about $16 billion in annual revenue. So, like Consolidated Edison, its scale is a competitive advantage in a commoditized industry.
American Electric’s 10-year average annual dividend growth rate is 5.4%, which is quite strong for a utility, a sector where we tend to see smaller increases. Even so, the stock yields 3.84%, and the payout ratio is low at 62%. That means that not only is American Electric’s dividend very safe, but it has a long runway for future increases.
With the payout ratio at just two-thirds of earnings, the company has the freedom to increase the payout even if earnings were to temporarily decline. Given this, the combination of safety, yield, and growth potential is outstanding for American Electric.
Utility Stocks: NextEra Energy (NEE)
Dividend Yield: 1.74%
Our third stock is NextEra Energy, an electric utility that generates, transmits, and distributes power to retail and wholesale customers in North America; the company is based in Florida and was founded in 1925. NextEra also has sizable scale for a utility, boasting 11 million residents and producing more than $16 billion in annual revenue.
NextEra shares have experienced a significant rally in recent weeks, driving its current yield lower to just 1.74%. On that measure, it is less attractive than Consolidated Edison and American Electric.
However, NextEra scores very well for dividend longevity, with its current increase streak at 25 years, and its dividend growth is outstanding for a utility. NextEra has boosted its payout by an average of nearly 11% each year over the past decade, putting it in rarified company, particularly for a utility.
In addition, NextEra’s payout ratio is still just 60%, meaning it has a very high level of dividend safety, and a long runway for future dividend increases. What investors might give up with NextEra in terms of current yield could be gained back by the very safe nature of the dividend, and its exceptional growth potential within a sector that generally doesn’t have that.
I like safe and secure dividend payouts for any market environment, particularly when utility stocks are volatile, as they have been in recent weeks. I also like utility stocks to help investors with their safe and growing payouts, and we see Consolidated Edison, American Electric, and NextEra as offering those options for future growth.
While each stock offers something different to investors, finding high-quality utilities that can continue to raise their payouts irrespective of market conditions is a great way to compound wealth over time — and we like the security and growth potential of these three utilities.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.