7 Discounted Utilities With Generous Dividends

These discounted Utilities with generous and safe dividends should deliver solid total returns over the next five years.
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As a dividend growth investor, I look for high-quality dividend growth stocks trading at reasonable valuations. Dividend safety is an important consideration, and I prefer to invest in stocks that have a good chance of delivering solid total returns (dividends plus price appreciation).

Utilities operate in a regulated environment and often as legal monopolies, so they have predictable and stable earnings. This allows some Utilities to pay generous dividends and to increase their dividend payouts over time.

The Chowder Number and 5-year Yield on Cost are measures of a stock’s future total return and dividend income prospects.

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For this article, I screened Dividend Radar stocks to find discounted Utilities with safe dividends, preferring Utilities likely to deliver strong total returns over the next five years.

Screening

The latest edition of Dividend Radar (dated August 13, 2021) contains 757 stocks, 59 of which are in the Utilities sector. To narrow my search, I used the following criteria:

  1. Dividend Safety Score > 60 (very safe and safe dividends)
  2. Stock Price < Fair Value Estimate (discounted stocks)
  3. 5-Year Yield on Cost [YoC] ≥ 4.00% (dividend income outlook)
  4. Could deliver annualized returns of 8% (total returns outlook)
  5. Quality score ≥ 15 (investment grade stocks)

Dividend Safety

I consider the Dividend Safety Scores provided by Simply Safe Dividends to assess dividend safety. Investing in companies with Very Safe or Safe dividends would have avoided 98% of all dividend cuts since 2015.

Dividend Safety Scores and their interpretation (source: Simply Safe Dividends)

Dividend Safety Scores and their interpretation (source: Simply Safe Dividends)

There are 44 Utilities in Dividend Radar with either Very Safe or Safe Dividend Safety Scores (20 are Very Safe).

Discounted Stocks

I use a crowdsourcing approach to estimate fair value. I collect fair values and price targets from reliable online sources like Morningstar and Finbox.com. With up to 11 available estimates per stock, I determine a reasonable fair value estimate by averaging the mean (average) and median (middle value) of the surveyed estimates.

Currently, 33 Utilities in Dividend Radar are trading below my fair value estimates.

Dividend Income Outlook

The 5-year YoC gives an indication of the dividend an investor can expect to receive after holding a stock for five years, relative to today’s stock price. It assumes the company continues to increase its dividend at the current 5-year dividend growth rate [DGR].

To calculate the 5-year YoC, I use the stock’s forward dividend yield and its 5-year DGR:

  • 5-year YoC = Forward Dividend Yield × (1 + 5-year DGR)^5

Here, ^5 means to the 5th power.

There are 31 Utilities in Dividend Radar whose 5-year YoC is at least 4.00%.

Total Returns Outlook

The Chowder Number [CDN) is a popular metric that favors dividend growth stocks likely to produce annualized returns of 8%. The CDN is calculated as the sum of a stock's forward dividend yield and its 5-year DGR.

In my tables, I color-code the CDN based on how likely it is that the stock will produce annualized returns of 8%, according to the Chowder Rule:

  • For stocks yielding less than 3%: red < 10 ≤ yellow < 15 ≤ green
  • For stocks yielding at least 3%: red < 8 ≤ yellow < 12 ≤ green
  • For utilities yielding at least 4%: red < 5 ≤ yellow < 8 ≤ green

Here are the meanings I ascribe to the CDN colors:

  • Green: Suitable candidates, likely to produce annualized returns of 8%.
  • Yellow: Possible candidates, less likely to produce annualized returns of 8%.
  • Red: Unacceptable candidates, unlikely to produce annualized returns of 8%.

In Dividend Radar, based on their CDNs, only 13 Utilities are suitable candidates, while 24 Utilities are possible candidates.

Investment Grade

DVK Quality Snapshots provide a simple and elegant way to assess the quality of dividend growth stocks. The system assigns 0-5 points to each of five quality indicators for a maximum quality score of 25 points. I assign ratings based on quality scores and consider stocks to be Investment Grade if their quality scores are 15 or higher.

Mapping of quality scores to Ratings and Investment Grade or Speculative stocks (source: DVK Quality Snapshots)

Mapping of quality scores to Ratings and Investment Grade or Speculative stocks (source: DVK Quality Snapshots)

There are 44 Investment Grade Utilities In Dividend Radar.

Short List

When intersecting the five individual screens, only 16 Utilities remain.

To further reduce the list, I ranked the 16 Utilities by descending quality scores and used the following tie-breaking metrics, in order and as necessary:

The Top-Ranked Utilities Passing All Five Screens

Discounted Utilities with generous and safe dividends, likely to deliver strong total returns over the next five years.

Discounted Utilities with generous and safe dividends, likely to deliver strong total returns over the next five years.

Next, let's look at each stock in turn. All data and graphs are courtesy of Portfolio-Insight.com.

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 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.

Screen Shot 2021-08-20 at 9.56.53 AM
PNW non-GAAP EPS and dividends paid (TTM), with stock price overlay

PNW non-GAAP EPS and dividends paid (TTM), with stock price overlay

American Electric Power Company, Inc. (AEP)

AEP is a public utility holding company that engages in the generation, transmission, and distribution of 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.

Screen Shot 2021-08-20 at 10.00.09 AM
AEP non-GAAP EPS and dividends paid (TTM), with stock price overlay

AEP non-GAAP EPS and dividends paid (TTM), with stock price overlay

Evergy, Inc. (EVRG)

Headquartered in Kansas City, Missouri, EVRG supplies electricity through two operating subsidiaries, Kansas City Power & Light Company (KCP&L) and Westar Energy. The company owns, operates, and maintains generation capacity and distribution lines and serves customers in Kansas and Missouri. EVRG was formed in 2018 by combining KCP&L and Westar Energy.

Screen Shot 2021-08-20 at 10.02.07 AM
EVRG non-GAAP EPS and dividends paid (TTM), with stock price overlay

EVRG non-GAAP EPS and dividends paid (TTM), with stock price overlay

The Southern Company (SO)

SO, along with its subsidiaries, operates as a public electric utility company. The company constructs, acquires, owns, and manages generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. SO was founded in 1945 and is headquartered in Atlanta, Georgia.

Screen Shot 2021-08-20 at 10.03.49 AM
SO non-GAAP EPS and dividends paid (TTM), with stock price overlay

SO non-GAAP EPS and dividends paid (TTM), with stock price overlay

Black Hills Corporation (BKH)

Founded in 1941 and headquartered in Rapid City, South Dakota, BKH is a diversified energy company with operations in the United States. BKH's regulated utilities segments provide electricity to customers in South Dakota, Wyoming, Colorado, and Montana; and natural gas to customers in Colorado, Nebraska, Iowa, and Kansas.

Screen Shot 2021-08-20 at 10.05.36 AM
BKH non-GAAP EPS and dividends paid (TTM), with stock price overlay

BKH non-GAAP EPS and dividends paid (TTM), with stock price overlay

ALLETE, Inc. (ALE)

ALE is an energy company, which, together with its subsidiaries, generates, transmits, and distributes electricity in the United States. The company generates electricity from coal, hydro, wind, and biomass. It is involved in the retail and wholesale of regulated electric, natural gas, and water services in Minnesota and northern Wisconsin. The company was founded in 1906 and is headquartered in Duluth, Minnesota.

Screen Shot 2021-08-20 at 10.07.23 AM
ALE non-GAAP EPS and dividends paid (TTM), with stock price overlay

ALE non-GAAP EPS and dividends paid (TTM), with stock price overlay

Spire Inc. (SR)

Formerly known as The Laclede Group, Inc, SR engages in the purchase, retail distribution, and sale of natural gas to residential, commercial, industrial, and other end-users of natural gas customers in the United States. SR was founded in 1857 and is headquartered in St. Louis, Missouri.

Screen Shot 2021-08-20 at 10.09.03 AM
SR non-GAAP EPS and dividends paid (TTM), with stock price overlay

SR non-GAAP EPS and dividends paid (TTM), with stock price overlay

Concluding Remarks

In this article, I presented seven discounted Utilities with safe dividends, preferring Utilities likely to deliver strong total returns over the next five years.

The included charts show a strong correlation between earnings growth and stock price growth. Since dividend growth depends on earnings growth, if the current trends continue, these Utilities should deliver solid total returns over the next five years.

All of these stocks are low-beta, defensive stocks, particularly suitable for Dividend Growth Investors looking to increase the defensive posture of their portfolios.

As always, I advise readers to do their own due diligence before investing.

Thanks for reading!

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