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Feature Article

The Search for Yield

By Roger S. Conrad on Apr. 15, 2017

The Dow Jones Utility Average yields less than 3.3 percent, a level usually seen when the market is closer to a top than a bottom. And even if annual dividend growth in the mid-single digits is the new normal for utilities, yields this low make it difficult for investors looking to build sustainable wealth or live off their investment income.

Consider the paltry returns offered by large-capitalization utility stocks that figure prominently in sector indexes and exchange-traded funds.

Leading water utilities American Water Works (NYSE: AWK) and Aqua America (NYSE: WTR), for example, yield 1.9 percent and 2.3 percent, respectively. Both high-quality companies have a lot of growth ahead of them, but we’d stand aside at these levels.

The top electric utilities are scarcely more generous with their payouts. NextEra Energy (NYSE: NEE) yields barely 3 percent, while Dominion Resources (NYSE: D) and Duke Energy Corp (NYSE: DUK) sport current returns of about 4 percent.

These yields beat the average savings account and offer the prospect of steady dividend growth.

Investors have also bid up shares of many smaller gas, electric and water utilities in expectation of potential takeover offers. For example, Atmos Energy Corp’s (NYSE: ATO) stock yields 2.25 percent, while water utility SJW Corp (NYSE: SJW) offers a current return of 1.79 percent.

Not only do these companies pay reliable dividends, but some could also attract lucrative takeover offers in coming months. Solid annual dividend growth sweetens the appeal.

But investors seeking above-average current income will need to look elsewhere.

Where Not to Look for Yield

Where should an investor hunt for big yields in an aging bull market where corporate borrowing costs remain near multi-generational lows and best-in-class utility stocks offer paltry yields?

Let’s start with where not to look: The Endangered Dividends List. These stocks offer high yields, but the companies’ underlying businesses face headwinds—eroding revenue, regulatory uncertainty, and/or crippling debt—that could force a dividend cut over the next six to 12 months.

 

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