This is my third stock purchase of the month and I’m looking at utility dividend stocks as the Utilities sector has the lowest weight in my dividend stock Portfolio. I’ll be buying the stocks as an automatic trade through Sharebuilder. Due to how their automatic trades work, the actual purchase will be made Tuesday and I have until 5pm on Monday to select the stocks. But since I’ll be working, I typically make the decision over the weekend based on Friday’s close, then fire and forget. I’m not investing huge amounts in any one stock so I’m not too concerned about price changes on Monday.
Here’s my portfolio as of 13-June, showing the sectors and their current weights. Utilities are the lowest, then Basic Materials and Financial.
I’m using my dividend investing rules to guide me in this process.
Utility dividend stocks
I have positions in AWR, GXP, LNT and VPU currently in the Utilities sector.
American States Water [AWR] is a $1.2B utility company in California that provides water and wastewater services. The company has increased its dividend for the last 59 years. Its payout ratio is 57.2% with a current dividend yield of 2.7%. Its P/E of 20.2 is higher than the industry average of 15.4 and the S&P 500 average of 18.3. Having said that, since 2004 its P/E has always been higher than the S&P 500 except for last year. The last 5 years’ dividend growth from 2009 to 2014 is about 10%.
Great Plains Energy [GXP] is the holding company of Kansas City Power & Light Company and KCP&L Greater Missouri Operations Company providing power to around 830,000 consumers . It’s a $3.9B company and has a fair valuation at present of 15.7 vs. the industry average of 15.4 and the S&P of 18.3. For the most part since 2004, its P/E has been lower than the S&P except for 2006, 2008 and 2011. The company’s current dividend yield of 3.66% has increased for the last 3 years. Over the previous 5 years the dividend growth was about 2%. The payout ratio is 55.1%.
Alliant Energy Corp [LNT] is a $6.4B Midwest energy company that provides electric and natural gas services to communities throughout Iowa, Wisconsin and Minnesota. The company has a P/E of 16 which is less than the Industry average of 18.7 and the S&P’s 18.3. Historically since 2004, the P/E tracks slightly under the S&P except for 2005 and 2009 when it was significantly higher. The current dividend yield is 3.54% with a payout ratio of 58.3%. LNT’s dividend growth over the last 5 years has been about 6.3%.
Vanguard Utilities ETF [VPU] is an ETF which I originally bought in January 2013 when I wasn’t sure which utility stocks to buy. It’s low cost (0.14% ER), commission-free and currently yielding around 3.41% in dividends. Its dividend growth has been about 6.4% since 2005 (as far back as I calculated it) and has increased every year since 2007. The dividends for 2005-2007 were the same.
I don’t own either of the following two companies; I included them to see how they compare to what I own and if they might be worthwhile purchases.
Middlesex Company [MSEX] owns and operates water utility and wastewater systems in New Jersey, Delaware and Pennsylvania. Its dividend yield is 3.67% with a payout ratio of 67.9% and it has increased its dividend each year for the last 41 years. Its P/E of 20.3 is higher than the industry and S&P averages of 15.5 and 18.3 respectively, although this particular company’s P/E has been higher than the S&P’s P/E every year since 2004.
Connecticut Water Service [CTWS] is a $0.35B holding company for water utilities in Connecticut. It’s another long term dividend champion having increased its dividend each year for the last 44 years. Its dividend yield is 3.08% with a payout ratio of 55.6%. The P/E ratio of 19 is above the industry average of 15.4 and the S&P’s 18.3, although like MSEX above, its P/E ratio has consistently been higher than the S&P average for each year since 2004.
What to buy?
Looking at all 6 choices, my criteria of requiring a 5 year dividend growth history eliminates GXP from the start. The remaining 5 companies have suitable dividend yield, however my criteria requiring a 3% dividend growth rate eliminates the two new dividend champion contenders.
I don’t know if a 3% dividend growth requirement is too harsh; especially for slow growth companies such as utilities. But seeing that both AWR and LNT has managed it, it’s clearly not impossible. Obviously the average dividend growth figure I’ve used is based on historical performance which doesn’t imply any future performance – I’m looking to include estimated future growth as a factor too but I’ve not taken that into account here.
So the result is that I’m going to continue with my current holdings and not add any new positions. Of the qualifying positions, VPU, AWR & LNT, LNT offers the most opportunity from its higher yield and higher dividend growth. AWR’s dividend growth rate is the highest of all the stocks in this comparison but on my 5 year forward projection it loses out to both CPU and LNT because its current yield is lower.
I’m only investing $330 this time around, so I’ve decided to purchase LNT but also to add to my VPU holding since there’s no commission. Eventually I want to move to $600+ trades at a standard $7 commission at Vanguard, but I’m currently enjoying the smaller and more frequent purchases at Sharebuilder.
My purchases this week
So total purchases this week are:
- $330 Individual Stocks (LNT, VPU)
- $250 Vanguard High Dividend Yield Index Fund (VHDYX)
- $100 Vanguard Total International Index Fund (VTIAX)
- $100 Vanguard High-Yield Corporate Fund (VWHEX)
These investments should increase my yearly dividend income by about $22.
Full disclosure: I am long AWR, GXP, VPU & LNT.
Quote of the day
One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.