Duke Energy shares returned about 16% through Sept. 7. Here, Duke transmission towers and power lines in Edwardsport, Ind.
Courtesy of Duke Energy
Utility stocks, traditionally a haven for income investors, haven’t been getting much respect relative to other sectors. But there’s still plenty of yield available.
The Utilities Select Sector SPDR fund (ticker: XLU), a proxy for large-cap U.S. utility stocks, returned 11% this year through Sept. 7, trailing the S&P 500’s 21.5%, dividends included. The fund also trails the S&P 500 over one-, two-, three-, and five-year periods. And among the 11 sectors in the S&P 500, the utilities sector is the second-worst performer over the past year with a return of 17.75% and ahead of only consumer staples.
These returns are hardly disastrous, but they illustrate how the market has gravitated to other sectors such as financials, which have returned about 50% over the past year, and even energy, up 37%.
Still, utility yields remain attractive, and the sector’s dividends have been durable throughout the pandemic with minimal cuts or suspensions.
“On a risk-adjusted basis, utilities are in a pretty good place,” says John Bartlett, president of Reaves Asset Management, which specializes in utilities and infrastructure holdings.
Utility Players
These utilities, all members of the S&P 500, have attractive yields and solid dividend growth prospects.
| Company / Ticker | Recent Price | Dividend Yield | Market Value (bil) | YTD Return |
|---|---|---|---|---|
| Edison International / EIX | $58.63 | 4.5% | $22.3 | -4.5% |
| Consolidated Edison / ED | 74.88 | 4.0 | 26.5 | 6.9 |
| Duke Energy / DUK | 103.20 | 3.7 | 79.4 | 16.1 |
| NiSource / NI | 24.72 | 3.5 | 9.7 | 10.7 |
| Entergy / ETR | 112.50 | 3.3 | 22.6 | 15.8 |
Prices and returns as Sept.7; other data as of Sept. 8
Source: FactSet
He points out that the 10-year U.S. Treasury note was recently yielding under 1.4%, far below those of most utility stocks. “Utilities are fine here,” Bartlett says. “We don’t start to get worried about utility valuations until we get meaningfully higher levels of interest [rates].”
The Utilities Select Sector SPDR fund recently traded at about 20 times 2022 profit estimates, above its five-year average of 17.7 times, according to FactSet. However, it trades at a discount to the market’s 2022 P/E of 20.8 times.
Bartlett says utilities “are also relatively cheap on a yield basis.” The median yield on the utility stocks he covers is about 3.25%, he says, “and the spread between that and the U.S. Treasury at [1.34% recently] is pretty attractive.”
Barron’s recently ran a screen that started with the highest-yielding utility stocks in the S&P 500.
Income Investing
We’re wary of chasing yield, however. “It’s always a dangerous game taking the highest yielders in a sector,” says Bartlett. “Those things usually have higher yields for a specific reason.”
So to guard against value traps, we then looked for utilities that raised their dividends in 2020 versus 2019 levels and are expected to increase their payouts this year as well, based on FactSet estimates.
The five companies in the screen are Edison International (EIX), which recently yielded 4.5%; Consolidated Edison (ED), 4.1%; Duke Energy (DUK), 3.8%; NiSource (NI), 3.5%; and Entergy (ETR), 3.4%.
Of the five stocks in our screen, Edison International, based in Southern California, is the only one that’s down this year, in that case minus 4.5%.
Bartlett, however, calls the electric utility “a perfectly worthy story”—though a shorter-term concern is the California fire season. He likes the company’s long-term prospects, however, and expects the dividend to continue to grow.
Consolidated Edison, based in New York City, faces a challenging regulatory setting, he says, and doesn’t have the growth that some utilities do. But Bartlett believes the dividend looks safe.
As for Duke Energy, he says, “there’s really nothing wrong with Duke.” Through Sept. 7, the Charlotte, N.C.–based utility’s stock had returned about 16%, about the same as Entergy’s performance.
NiSource, based in Indiana, has returned about 11% this year. It’s a fully regulated utility with about 3.2 million natural-gas customers and 500,000 electric customers across six states.
Entergy, based in New Orleans, took a big hit from Hurricane Ida, which knocked out power in much of that region. But the stock has held relatively steady, having gained 0.7% since Aug. 27—compared with about 0.1% for the Utilities Select Sector SPDR. Besides Louisiana, the company’s footprint covers Mississippi, Arkansas, and Texas. The stock “has given a little back because of the hurricane,” says Bartlett, who maintains that the company’s dividend is safe.
Concerns aside, these utilities figure to deliver dividends that should smooth out ups and downs.
Write to Lawrence C. Strauss at lawrence.strauss@barrons.com