Utility sector dividend stocks – first purchase in September

The US markets are closed on Monday due to Labor Day, so I had to set Sharebuilder yesterday on Friday to meet the automatic trade timing. This week, Utilities is the lowest weighted sector in my dividend stock Portfolio. The last purchase I made in his sector was back in June when I purchased LNT.

Here’s my portfolio as of 30-August, showing the sectors and their current weights. Utilities are the lowest, followed by Basic Materials then Consumer Cyclical.

My Portfolio as of 29-August 2014 showing Utility stocks as the lowest weighted sector, followed by Consumer Cyclical then Basic Materials.
My Portfolio as of 29-August 2014 showing Utility stocks as the lowest weighted sector, followed by Consumer Cyclical then Basic Materials.

I’m using my dividend investing rules to guide my selection.

My Utility dividend stocks

I have currently have positions in AWR, GXP, LNT and VPU in the Utilities sector.

American States Water (AWR)

American States Water [AWR] is a $1.2B utility company in California that provides water and wastewater services.

The company is a dividend champion and has increased its dividend annually for the last 60 years. It offers a dividend yield of 2.6%. Its payout ratio is 54% which is in-line with the last three years, and down from the 60-70% levels reached between 2000 and 2010. The annualized dividend growth over the last 5 years is the highest in this round-up at 10.5%.

Its P/E of 21.4 is higher than the industry average of 15.6 and the S&P 500 average of 18. Since 2004 AWR’s P/E has always been higher than the S&P 500 except for last year. Projected EPS growth over the next 5 years is 1.0%.

Great Plains Energy (GXP)

Great Plains Energy [GXP] is the holding company of Kansas City Power & Light Company and KCP&L Greater Missouri Operations Company with a market cap of $3.9B. It provides power to around 830,000 consumers.

The company’s current dividend yield of 3.6% has increased slowly over the last 4 years, with a 5 year dividend growth rate of 2%. The payout ratio is 60% which compares well with levels over the last 4 years. The annualized dividend growth over the last 5 years is quite low at 2.0%.

GXP has a P/E of 16.8 vs. the industry average of 19.9 and the S&P of 18.2. For the most part since 2004, its P/E has been lower than the S&P (except for 2006, 2008 and 2011); this year being no exception. Estimated 5 year EPS growth is 5.2%.

Alliant Energy Corp (LNT)

Alliant Energy Corp [LNT] is a $6.5B Midwest energy company that provides electric and natural gas services to communities throughout Iowa, Wisconsin and Minnesota.

The current dividend yield is 3.5% with a payout ratio of 56%. The payout ratio has been trending down over the last 4 years, with low income raising the P/O ratio to 148% in 2009. LNT’s dividend growth over the last 5 years has been about 6.3%.

The company has a P/E of 16.2 which is less than the Industry average of 19.9 and the S&P’s 18.2. Historically since 2004, the P/E tracks slightly under the S&P except for 2005 and 2009 when it was significantly higher. Projected 5 year EPS growth is 4.7%.

Vanguard Utilities ETF (VPU)

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 3.3% in dividends. Its dividend growth has been about 4.9% since 2009 and has increased every year since 2007. The dividends for 2005-2007 were the same. The annualized dividend growth over the last 5 years is 4.9%.

The fund holds 79 utility stocks, the top 10 being Duke Energy, NextEra Energy, Dominion Resources, Southern Co., Exelon Corp, American Electric Power, Sempra Energy, PPL Corp, PG&E Corp and Public Service Enterprise Group. These 10 companies occupy about 50% of total net assets.

Choosing new stocks to consider

I already have 4 stocks in this sector, with 5 being my maximum allotment so I’m not in a hurry to fill the fifth slot. The following three companies are all in my watchlist at the moment and they’re all water utilities, so I’m just letting them ride in this roundup.

Middlesex Company (MSEX)

Middlesex Company [MSEX] owns and operates water utility and wastewater systems in New Jersey, Delaware and Pennsylvania. It’s a smaller sized company, having a market cap of $3300M.

Its dividend yield is 3.7% with a payout ratio of 73% and it has increased its dividend each year for the last 41 years. While the Payout Ratio is quite high in comparison to other stocks in this review, it is trending down from a peak of 83.7 reached in 2012. The annualized dividend growth over the last 5 years is very low at 1.3%.

Its P/E of 19.9 is higher than the industry and S&P averages of 15.6 and 18.2 respectively, although this particular company’s P/E has been higher than the S&P’s P/E every year since 2004. For the last two years, the difference between MSEX’s P/E and the S&P has been about 1.5, this is a much narrower range than previous years. Estimated 5 year EPS growth is 2.7%.

Connecticut Water Service Inc

Connecticut Water Service [CTWS] is a $365M 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 3.1% with a payout ratio of 51%. The current payout ratio is a great improvement from the high of 81% reached in 2010, and the value has been steadily decreasing for the last 4 years. The annualized dividend growth over the last 5 years is quite low at 2.3%.

The P/E ratio of 16.7 is above the industry average of 15.6 but below the S&P’s 18.2. This year marks the first year (starting from 2004) where CTWS’ P/E value is lower than the S&P average. Estimated EPS growth over the next 5 years is 5%.

American Water Works

America Water Works (AWK) provides water services to residential, commercial and industrial customers n the US and Canada. It’s a $9B company, organized into two reporting segments; Regulated Businesses and Market-Based Operations.

AWK is a dividend challenger, having increased dividends yearly for the last 7 years. It offers a yield of 2.4% with a payout ratio of 55%. The current payout ratio is higher than last year’s 40% but still within its range since 2010. AWK’s dividend has increased at an annualized rate of 8.1% over the last 5 years.

P/E is high at 23.4, beating both the industry average of 15.4 and the S&P 500 average of 18.2. The P/ has always been higher than the S&P since 2010 and the gap this year is significantly higher than previous years. Estimated 5 year EPS growth is 9.2%; the highest in this roundup.

Honorable mentions

Black Hills Corporation (BKH)

I didn’t have time to look into this stock this week, but it is a long running dividend growth stock with a reasonable forward EPS growth estimate. I plan on looking at this the next time I visit Utilities again.

Consolidated Edison (ED)

ED has one of the higher yields in the Dividend Champions, with a long dividend growth history of 40 years. It didn’t make it past my screener however due to negative growth this year.

What to buy?

Looking at all 7 companies, my criteria of requiring a 5 year dividend growth history eliminates GXP from the start.

Of the remaining 6 companies, two fail to meet my criteria for 3% dividend growth, so MSEX and CTWS are eliminated.

VPU, AWR, LNT and CTWS all match my minimum criteria.
Despite a great growth prospect, AWK is penalized by a low yield and a short growth history plus an unstable dividend payment schedule.

With its amazing 60 year dividend growth history, AWR is also penalized by a low yield and low future growth prospects.

Although LNT’s dividend history is shorter than the three 40+ year champions in this review, its 11 year history is still respectable. Its higher yield and reasonable growth estimates make it an attractive candidate.

It’s not really fair to compare an ETF with a stock, but LNT does pretty well and loses out to VPU because of a smaller market-cap.

Here is the comparison visually.

Yield #Yr DivGr5 EstGr5 Projected Stable Score Status
VPU 3.3 5 4.9 4.9 20 5 39 Buy
LNT 3.5 11 6.3 4.7 21 5 38 Buy
AWR 2.6 60 10.5 1.0 14 3 34 Buy
AWK 2.4 7 8.1 9.2 15 2 25 Buy
CTWS 3.1 44 2.3 5.0 18 5 0 Hold
MSEX 3.7 41 1.3 2.7 22 5 0 Hold
GXP 3.6 4 2.0 5.2 22 5 0 Hold

My purchases this week

My conclusion is that I’m going to continue with my current holdings and not add any new positions. I’ve decided to stick with regular stocks this week and so I will purchase LNT over VPU.

Total purchases this week are:

  • $330 Individual Stocks (LNT)
  • $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 $24.

Full disclosure: I am long AWR, GXP, VPU & LNT.


Quote of the day

One way to get the most out of life is to look upon it as an adventure.

15 thoughts on “Utility sector dividend stocks – first purchase in September”

  1. DivLife,

    Great purchase, well analyzed! What’s great is that you stick to your strategy, your score table and then add in your judgment. It looks as though LNT has great growth history with 11 years and a better growth rate than the ETF. Nice job DL, keep it up.


  2. Thanks for posting this because it was very helpful. I don’t currently own any utility stocks but I have looked at (ED) and (AWR). I need to take a further look at the other companies you have mentioned here. I am not sure if you have looked at (NGG) but they are also an interesting utility company. Best Regards!

    1. Hi DividendMongrel,

      Thanks for the feedback! Utility stocks are (in theory) fairly stable and low growth but also typically have higher yields.

      I didn’t look at NGG this time although I’ve read some good things about the National Grid. It looks like they only have a 3 year dividend growth after cutting their dividend slightly in 2010, so they haven’t reached the Dividend champion list yet.

      Best wishes,

  3. I purchased VPU when I didn’t know which utility stock to buy. VPU has been performing reasonably well and decent dividends.
    The other stocks you mentioned look promising and I need to look at those in detail when I plan to initiate new position in the utility sector.


    1. Hi DGJ,

      Yes VPU originally for exactly the same reasons! It’s a cheap & easy way to diversify and while you can get higher yields with specific stocks, it pays out quite well.

      Hope you had a great month too!
      Best wishes,

    1. Hi DFG,

      I add to my Vanguard funds for a couple of reasons:

      1. The VHDYX fund in particular has outperformed my individual stocks both in value and in dividend payout, although I’ll revisit the comparison at the end of this month to see if I caught up or fell further behind. It’s a great way to diversify into 395 dividend paying stocks.

      2. Brokerage stock trade commissions become cheaper ($7 -> $2 -> $Free) as your account balance increases. I have a former 401K and taxable funds held there so I hope to qualify for lower trades in a few years.

      3. Once I reach $50K in the corporate bond fund, the expense ratio drops to 0.13%. I’m pretty close to achieving that so I wanted to reach that threshold.

      Thanks for the question – there’s a little method to my madness I hope!

      Best wishes,

  4. As a company, I like AWK quite a bit. It’s looking kind of pricey here, so I’m hoping for a pullback at some point so I can get in at a better level. VPU may also be cost effective for people who are going to put a lot of money into utilities, but who want some exposure.

    1. Hi S.B.
      Yes I agree with you – AWK has some good growth prospects I think but it’s too expensive. I tend to let the dividend yield judge the valuation – a rate of 2.4% is the lowest compared to the others. So if the price dropped and increased the yield, it’d be more interesting for me.

      Did you mean VPU might be cost effective for people who aren’t going to put a lot of money into utilities?

      Thanks for stopping by!

      Best wishes,

        1. Hi Ray,

          Yes I have a lot of cash as part of my income fund that I’m not aggressively spending right now; I’m just slowly dollar cost averaging into index funds with it rather than buying individual stocks.

          I certainly hear you about the volatility in the market at the moment; but in truth it’s always been there since stocks are volatile by definition and we’ve just been quite lucky with a long steady increase over the past few years.

          And for a 100% stock portfolio every investor should expect a 50% drop in value at least once in their investing lifetime 🙁

          But in the long term “Time In The Market” is generally better than trying to “Time The Market”; volatility can be reduced by choosing the percentage of stocks vs percentage of bonds that you hold since bonds tend to go up when stocks go down. Today my VWESX bond fund went up 1.1% while my VHDYX stock fund went down 0.55%.

          Best wishes,

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