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7 Best Utilities Sector Dividend Stocks

These dividend growth stocks are my top-ranked Utilities sector picks. Several are trading below my risk-adjusted Buy Below prices, so investors have some opportunities here!

Today’s article concludes my article series identifying high-quality stocks in each GICS sector.

My watchlist of dividend growth stocks is Dividend Radar, a list of stocks trading on U.S. Exchanges with dividend increase streaks of five or more years. Dividend Radar is a free resource for dividend growth investors, maintained and published every Friday by Portfolio Insight. The latest edition (dated October 1, 2021) contains 744 stocks, of which 58 fall in the Utilities sector.

I use DVK Quality Snapshots to assess the quality of dividend growth stocks, assigning 0-5 points to each stock based on how they rate on five widely-used quality indicators. The total of these points is a stock’s quality score out of a maximum of 25 points. I rank stocks by sorting them in descending order of quality score. When stocks have the same quality score, I use tie-breaking metrics to rank them.

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This article presents the seven top-ranked stocks in the Utilities sector.

In case you missed previous articles in this series, here they are:

The Utilities Sector

The Global Industry Classification Standard® (GICS) assigns companies to a single business classification according to their principal business activity. The first level of the four-tiered, hierarchical industry classification system is the Sector.

The Utilities sector comprises utility companies such as electric, gas, and water utilities. It also includes independent power producers, energy traders, and companies that engage in generating and distributing electricity from renewable sources.

The Utilities sector usually performs better than other GICS sectors when concerns about slowing economic activity surface. People need water, gas, and electricity during all phases of the business cycle! Additionally, lower interest rates that coincide with a weak economy provide cheaper funding for the large capital expenditures required by many companies in this sector.

A detailed breakdown of the Utilities sector (source: Dividend.com)

A detailed breakdown of the Utilities sector (source: Dividend.com)

Sector and Performance Comparison

Let’s compare the sector averages and historical performance of the GICS sectors over different periods to see how the Utilities sector compares:

Sector averages of Dividend Radar stocks and the historical performance of sectors (data sources: Dividend Radar, Fidelity Research, and Google Finance - 6 October

Sector averages of Dividend Radar stocks and the historical performance of sectors (data sources: Dividend Radar, Fidelity Research, and Google Finance - 6 October

The table is color-coded to show each column’s highest (green) and lowest (red) values. The Utilities sector has the smallest average market cap, the smallest average beta, and the worst 1-year performance of the 11 GICS sectors. Only the Energy and Consumer Staples sectors have higher average yields, while the Utilities sector has the second-highest average dividend streak at 21.4 years.

Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:

Sector performance charts (created by the author with data from Fidelity Research - 6 October 2021)

Sector performance charts (created by the author with data from Fidelity Research - 6 October 2021)

The Utilities sector underperformed the S&P 500 in every trailing time frame, except over the past year!

Quality Assessment

I use DVK Quality Snapshots to assess the quality of dividend growth stocks. The system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points. To rank stocks, I sort them by descending quality scores and break ties by using the following factors, in turn:

  • SSD Dividend Safety Scores
  • S&P Credit Ratings
  • Dividend Yield

I rate stocks by quality score as Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Investment Grade ratings have quality scores in the range of 15-25, while Speculative Grade ratings have quality scores below 15.

Top-Ranked Utilities Sector Stocks

Here are the seven top-ranked dividend growth stocks in the Utilities sector:

Screen Shot 2021-10-08 at 7.28.47 AM

Note that I’m long the four highlighted stocks in my DivGro portfolio.

1. NextEra Energy, Inc. (NEE)

NEE generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America. The company generates electricity through wind, solar, nuclear, and fossil fuel. It also develops, constructs, and operates assets focused on renewable energy generation. NEE was founded in 1984 and is based in Juno Beach, Florida.

2. Public Service Enterprise Group Incorporated (PEG)

PEG is an energy holding company with operations in the Northeastern and Mid-Atlantic United States. The company transmits and distributes electricity and natural gas. It operates nuclear, coal, gas, oil-fired, and renewable generation facilities with a generation capacity of about 12,000 megawatts. PEG was founded in 1985 and is headquartered in Newark, New Jersey.

3. Atmos Energy Corporation (ATO)

Founded in 1906 and headquartered in Dallas, Texas, ATO and its subsidiaries are engaged in the distribution, transmission, and storage of natural gas in the United States. The company delivers natural gas to residential, commercial, public authority, and industrial customers in nine states in the southern USA. ATO also operates intrastate gas pipelines in Texas.

4. Pinnacle West Capital Corporation (PNW)

PNW is a holding company that provides retail and wholesale electric services primarily in the state of Arizona. Its subsidiary, Arizona Public Service Company, is a vertically integrated electric company that generates, transmits, and distributes electricity using coal, nuclear, gas, oil, and solar resources. PNW was founded in 1920 and is headquartered in Phoenix, Arizona.

5. WEC Energy Group, Inc. (WEC)

Founded in 1981 and based in Milwaukee, Wisconsin, WEC is an energy company that serves customers in Wisconsin, Illinois, Michigan, and Minnesota. The company's principal utilities are We Energies, Wisconsin Public Service, Peoples Gas, North Shore Gas, Michigan Gas Utilities, and Minnesota Energy Resources. WEC’s subsidiary, We Power, designs, builds, and owns electric generating plants.

6. American Electric Power Company, Inc. (AEP)

AEP is a public utility holding company that engages in generating, transmitting, and distributing electricity to customers in the United States. The company generates electricity using coal and lignite, natural gas, nuclear, and hydroelectric, and other energy sources. AEP was founded in 1906 and is headquartered in Columbus, Ohio.

7. IDACORP, Inc. (IDA)

Founded in 1915 and headquartered in Boise, Idaho, IDA is a holding company engaged in generating, transmitting, purchasing, and selling electric energy in the United States. The company operates 17 hydroelectric generating plants in southern Idaho and eastern Oregon, and three natural gas-fired plants in southern Idaho.

Please note that these stocks are candidates for further analysis, not recommendations.

Key Metrics and Fair Value Estimates

Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates:

  • Yrs: years of consecutive dividend increases
  • Qual: DVK Quality Snapshots quality score
  • Fwd Yield: forward dividend yield for a recent share Price
  • 5-Avg Yield: 5-year average dividend yield
  • 5-DGR: 5-year compound annual growth rate of the dividend
  • 5-YOC: the projected yield on cost after five years of investment
  • C#: Chowder Number, a popular metric for screening dividend growth stocks
  • 5-TTR: 5-year compound trailing total returns
  • VL Safety Rank: Value Line's Safety Rank
  • VL Fin Stren: Value Line's Financial Strength ratings
  • MS Econ Moat: Morningstar's Economic Moat
  • S&P Cred Rating: S&P Global's Credit Ratings
  • SSD Divi Safety: Simply Safe Dividends' Dividend Safety Scores
  • Buy Below: my risk-adjusted buy below price (see below)
  • –Disc +Prem: discount or premium of the recent share Price to my Buy Below price
  • Price: recent share price
Screen Shot 2021-10-08 at 7.37.00 AM
Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

My risk-adjusted Buy Below price allows a premium of up to 10% for stocks rated Exceptional and a premium of up to 5% for stocks rated Excellent. In contrast, my Buy Below price equals my fair value estimate for stocks rated Fine, while I require a discount of at least 10% for stocks rated Decent. I'm not interested in stocks rated Poor or Inferior.

I use a survey approach to estimate fair value, referencing fair value estimates and price targets from several online sources, including Morningstar and Finbox. Additionally, I estimate fair value using the 5-year average dividend yield of each stock using data from Portfolio Insight. With several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Commentary

With quality scores of 21-22, all of the top-ranked Utilities sector stocks are rated Fine.

Four stocks are trading below my risk-adjusted Buy Below prices, and the remaining stocks are trading just above my Buy Below prices. Depending on your risk tolerance, those stocks may be suitable candidates, too.

Except for NEE and PEG, the forward yield of each of the top-ranked Utilities sector stocks exceeds the corresponding 5-year average dividend yield. This means the stocks ranked #3-#7 have attractive current forward yields!

PNW offers an excellent opportunity for income investors. The stock has the highest forward yield (4.48%) and the highest projected yield on cost after five years of investment (5.9%).

Dividend growth investors should consider ATO. The stock yields a respectable 2.77% and a robust 5-year dividend growth rate of 8.3%. Moreover, ATO is discounted by 11% to my Buy Below price.

NEE appears to be the strongest candidate for total return investors, though I would wait for a lower entry point. Below $81 would be good, but closer to $70 would be better. The stock has delivered annual total returns of around 24% over the past 5-years!

Speaking of total returns, let’s compare the trailing 10-year total returns (price appreciation and dividends) of the top-ranked Utilities sector stocks:

Comparison of the total returns of the top-ranked Utilities sector stocks over the past ten years (source: Portfolio-Insight.com)

Comparison of the total returns of the top-ranked Utilities sector stocks over the past ten years (source: Portfolio-Insight.com)

Over the 10-year timeframe, only NEE outperformed the SPDR S&P 500 ETF (SPY). SPY is an exchange-traded fund designed to track the 500 companies in the S&P 500 index. NEE returned 686% (about 22.89%% annualized) versus SPY’s 353% (16.31% annualized).

NEE’s non-GAAP EPS and dividends paid (TTM), with stock price overlay (source: Portfolio-Insight.com)

NEE’s non-GAAP EPS and dividends paid (TTM), with stock price overlay (source: Portfolio-Insight.com)

Here are similar charts for PNW and ATO:

PNW’s non-GAAP EPS and dividends paid (TTM), with stock price overlay (source: Portfolio-Insight.com)

PNW’s non-GAAP EPS and dividends paid (TTM), with stock price overlay (source: Portfolio-Insight.com)

ATO’s non-GAAP EPS and dividends paid (TTM), with stock price overlay (source: Portfolio-Insight.com)

ATO’s non-GAAP EPS and dividends paid (TTM), with stock price overlay (source: Portfolio-Insight.com)

Concluding Remarks

This article presented the seven top-ranked dividend growth stocks in the Utilities sector.

Based on my rating system that maps from DVK Quality Snapshots to quality scores, all these stocks are rated Fine.

Four stocks are trading below my risk-adjusted Buy Below prices: ATO, PNW, AEP, and IDA. Of these, ATO and PNW present the best opportunities at current prices.

NEE would be great at a lower price, especially for investors seeking total returns.

Thanks for reading!

I’ll write one more article to wrap things up and summarize each GICS sector’s top opportunities.

You can follow me here:

  • Twitter: @div_gro
  • Facebook: @FerdiS.DivGro

I’d be happy to answer any questions you may have!

Note: Interested in getting periodic e-mail notifications when articles are published here? Drop your e-mail in the box below!

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7 Best Real Estate Sector Dividend Stocks

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