Typically, utility stocks are a bastion of safety for dividend investors: their payouts are big, they're predictable, and their businesses are legal monopolies. But when a dividend baloons out of size, a dividend cut looks like the more likely scenario. That's what's going on at Pepco Holdings (POM - Get Report), a $4.3 billion utility company.
Pepco owns three regulated utility firms, Pepco in the Washington D.C. region, Delmarva Power & Light along the shores of Maryland and Delaware, and Atlantic City Electric in New Jersey. The firm has been holding a yard sale, offloading most of its generation assets, and focusing its business on regulated power retailing. While that does help make the firm's earnings more stable, it doesn't change the fact that Pepco's payouts are oversized right now.That's because the firm is paying out more than it earns at the same time that it's planning to dump a ton of cash into its power infrastructure. With most of the proceeds from the sales of power plants going to pay down debt (a good thing, no doubt), POM can't keep paying out a hefty 5.7% dividend yield. A cut seems like the most likely outcome, especially with the firm's operations under the watchful eyes of regulators in a handful of jurisdictions. To see these perilous dividends in action, check out the at Potential Dividend Cuts portfolio on Stockpickr. And if you haven't already done so, join Stockpickr today to create your own dividend portfolio. -- Written by Jonas Elmerraji in Baltimore.
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