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After a 5% loss in 2015, the S&P 500 Index is down another 10% just since the beginning of the year. The extended decline in the market has stoked fears that the U.S. economy is about to enter a recession. Indeed, there are concerning signs all around, including the strengthening U.S. dollar, plunging commodity prices, and economic slowdown in the emerging markets.
With all this in mind, risk-averse investors should consider safe haven plays such as utilities. Utility stocks are famously known as “widow-and-orphan” investments, because of their ability to pay quarterly dividends like clockwork, regardless of the direction of the markets.
For investors who can’t stomach the market volatility, take a closer look at Dominion Resources (NYSE: D), Consolidated Edison (NYSE: ED) and PPL Corp. (NYSE: PPL).
Utility Stocks: When Boring Is Beautiful
Utility stocks aren’t likely to be the next hot stock idea. They do not get much coverage in the financial media, and they certainly won’t make their shareholders rich overnight. But they provide something just as valuable: stability.
At a very fundamental level, the investing premise for utilities is simple: People need to keep the lights on, and that holds true whether the economy is booming or in recession. Demand for electricity is about as stable as it gets.
That means utilities have a very recession-resistant business models. Power generation is a matter of national security. Since regulated utilities can increase their rates each year, utility stocks can pay generous dividends to shareholders, and raise them each year. All of those factors help utility stock investors sleep well at night.
For example, Dominion Resources recently increased its dividend by 8%. This brought the new annualized dividend to $2.80 per share. At its current stock price, that results in a 4% dividend yield. Dominion’s high dividend growth is expected to continue. The company projects 8% dividend growth each year through the end of the decade.
Such strong dividend growth is the result of the company’s energy infrastructure growth. Dominion’s strategy is to acquire new customers, which will immediately boost revenue, and then to further raise revenue through rate increases. This twofold plan has worked well. Last quarter, Dominion achieved 10% earnings growth. For a utility, that is a very strong growth rate.
With a 4% yield and 8% annual dividend growth from here, Dominion is a unique find in the utility sector.
Consolidated Edison is a regulated gas and electric utility provider in the northeast United States. It services more than 3 million customers, primarily in New York City. ConEd increased its annualized dividend to $2.68 per share, up from the previous $2.60 per share annualized payout. This is a 3% dividend increase, and represents ConEd’s 42nd year in a row of consecutive dividend increases, making ConEd a Dividend Aristocrat. The stock currently yields 4%.
ConEd’s earnings rose 1% over the first nine months of 2015, year-over-year. Excluding one-time gains and charges, earnings grew 4%. This is more than enough growth to sustain ConEd’s current dividend, and also provide the flexibility to raise dividends each year and keep ConEd on the Dividend Aristocrat list.
PPL is a utility that operates in both the U.S. and the United Kingdom. Last year, PPL’s earnings from continuing operations increased 9% from 2014. Going forward, the company expects 5%-6% compound earnings growth through 2020.
After its successful year, PPL raised its annualized dividend by 1%, to $1.52 per share. That represents a strong 4.2% yield.
The Shelter of Utility Stocks
Utility stocks probably aren’t going to lead the next market rally, but they do offer relative safety when the market declines. Utilities have lower volatility and higher dividend yields than the overall stock market. This provides their investors with margins of safety against big declines.
Utility stocks provide reliable dividends, and the three mentioned above each yield at or above 4% annually. Cautious investors should take a closer look at utility stocks in this unsettling environment.
Organize Your Dividends With One Step
Do you know when your next dividend stock pays out? Do you know when the dividend stock you want to buy more of pays out — and how much? We’ve put together a simple calendar that highlights many of the market’s best dividends into one easy to scan document. Read it once, and you’ll see how to set up a 12 month dividend stream to ensure income all year long.
Click here to see the full details of the Dividend Calendar…