The utility sector is one of the best sectors for reliable dividend income.
Three of the most dependable, highest-yielding dividend stocks for income are found in the sector.
Each of these regulated utility companies essentially operates as a monopoly in its service area and generates predictable earnings and dividend growth.
These are desirable characteristics when seeking long-term investments for the Conservative Retirees dividend portfolio.
Let's take a look at the three high-yield utility stocks that are paying out safe, reliable income.
Known as ConEd by consumers, this company provides electric and gas services to about 3.7 million and 1.2 million customers, respectively. ConEd is also one of the largest owners and operators of solar PV in North America.
The company's customers are primarily located in New York, and almost all ConEd's income is derived from regulated activities.
ConEd has little power generation activities and is mainly involved in distribution, resulting in a stable business model.
Barriers to entry in its markets are high for a few reasons.
First, maintaining transmission infrastructure to move electricity and gas from power plants to customers is extremely capital intensive and demands substantial maintenance and repair costs each year.
Equally important, new entrants would need to obtain consent from the state authority, meet numerous safety and service standards, install transmission facilities to provide service, comply with strong state regulations, and more. There aren't enough customers in a region to justify having another competitor.
The utility industry also went through a period of major restructuring in the 1990s. All the electric and gas delivery service in New York is now provided by just four investor-owned utility companies or one of two state authorities.
Considering the local nature of the utility business and the high amount of regulation, it seems unlikely that another company would be allowed to provide utility delivery service in ConEd's markets.
ConEd's growth prospects are limited, but its reliable earnings have made for a very dependable dividend.
The company is a member of the dividend aristocrats list and has raised its dividend for 42 consecutive years. It most recently raised its payout by 3% early this year.
ConEd's stock offers a dividend yield of 3.7% and trades for 18 times forward earnings estimates.
Duke Energy's operating history dates back to the early 1900s, and the company has grown to become the largest electric utility in America, with more than $23 billion in annual sales.
The regulated utility company serves about 7.4 million electric customers and 1.5 million gas customers across the Midwest and Southeast.
With the exception of Ohio, practically all Duke Energy's electric utilities operate as sole suppliers within their service territories. They are essentially monopolies, which is why their services are priced by state commissions.
Duke Energy's geographical mix is generally favorable. During the past three years, base rate cases approved to Duke Energy have granted the company a return on equity ranging from 9.8% to 10.5% across Florida, North Carolina, Ohio and South Carolina.
These are decent returns for a utility and indicate a generally favorable set of regulatory bodies in Duke Energy's core operating states.
Overall, regulated utility companies such as Duke Energy can provide safe retirement income with less risk than other types of businesses because of their predictable earnings, government-supported competitive advantages and low stock price volatility.
Duke Energy has paid quarterly dividends since the 1920s and appears set to increase its dividend for the ninth consecutive year in 2016. Duke Energy has been the definition of a blue-chip dividend stock.
Dividend growth has only averaged 2% per year over the past decade, but management intends to double that rate to better reflect the company's lower-risk business mix and core earnings growth rate of 4% to 6%.
Duke Energy offers conservative income investors a high dividend yield of 4.28% and trades for 16.8 times forward earnings estimates.
Southern is a major producer of electricity in the United States and has been in business for more than a century.
The company serves about 4.5 million customers across Alabama, Florida, Georgia and Mississippi.
Importantly, about 90% of Southern's earnings are from regulated operations, which helps the company generate predictable earnings and a stable return on equity.
The Southeast has been very friendly to businesses, and Southern operates in four of the top eight most favorable state regulatory environments in the United States.
Population growth in the region has also been relatively strong, driving demand for utility services higher over time.
Looking at the dividend, Southern raised its payout by 3% last month, marking its 15th consecutive annual increase.
Southern has made consecutive quarterly dividend payments for more than 67 years and is one of the most reliable stocks for income.
Although the company's dividend payout ratio is near 80%, its stable earnings and impressive track record alleviate any concerns about the dividend's safety.
The stock has been great for long-term shareholders as well. Over the past 30 years, shares of Southern's have delivered an annualized total shareholder return of 14%.
With a high dividend yield of 4.59%, Southern is an appealing option for safe retirement income.
This article is commentary by an independent contributor. At the time of publication, the author was long ED.