It is always a good idea to include some companies in your portfolio that provide a steady stream of income. Some investors like bonds, as they tend to be less risky than stocks. However, those looking for steady investments with a bit more upside than bonds can turn to utilities. Utilities are very stable and provide steady income to investors for various reasons.
The business model of utility companies is very sound in all economic conditions. Even when times are tight, one might buy value-brand groceries, go out to eat less, or rent a movie instead of going to the theater. Nobody stops drinking water, heating their home, or using candles to read.
They are steady
Utility stocks are also dependable. While a utility is still a stock and is therefore vulnerable to a brutal bear market, utilities carry very low betas and will never be too volatile. This can cause utilities to appear boring. You will be glad for that when the markets are fluctuating, sending stocks up and down by the week (as they have been doing lately).
They pay dividends
Utility stocks can be among the biggest dividend payers out there, and some of the most consistent. Many utility companies have been increasing dividend payments on an annual basis for decades. Utility companies can be slow growers, tend to grow through acquisitions, and pay a higher percentage of earnings out as dividends. However, due to stability, utilities can make a nice foundation for income in your portfolio.
We will focus on the Big 3 of utilities for our investing needs: water, electric, and gas.
Aqua America Inc (NYSE:WTR) is a water utility that conducts business in the eastern US, Illinois, Indiana, and Texas. It has increased its dividend every year for 22 years running. It is currently paying out about 54% of its earnings as dividends while the dividend has grown at a 7.86% compound annual growth rate over the last decade. It currently yields 2.45%. While a bit low for a utility, the stock is currently trading at a premium for a utility due in part to its above-average growth.
Aqua America Inc (NYSE:WTR) has also been very active in making acquisitions to grow earnings. It has made over 200 acquisitions in the last decade, and $12 million dollars in acquisitions in the first half of 2013. Due to the fragmentation, typical of the water industry, Aqua America Inc (NYSE:WTR) looks to continue this strategy to grow earnings.
Looking at the company’s latest annual report, you can see the strategy paying off. Operating revenues have increased 10% from last year. Operating cash flows have increased 7%. This is impressive growth for a utility, as earnings per share have increased from $0.90 in 2010, to $1.47 per share today.
The Southern Company (NYSE:SO) is an electric utility that operates in the Southeast United States. It pays a dividend yielding 4.7% of current prices. Its dividend has grown at a CAGR of 3.7% over the last 10 years while being increased annually for the last 12. It pays out 86% of its earnings as dividends.
The Southern Company (NYSE:SO) is not in the growth stage that you see with Aqua America Inc (NYSE:WTR). However, it is a mature, income-producing company that has sector-leading operating margins and return on equity. Southern Company is also taking steps to stay with recent energy trends. It is shifting from coal-based production to natural gas and nuclear power.
The Southern Company (NYSE:SO) posted its most recent 10-Q filing in May. Its operating revenues increased from $3.6 billion to $3.9 billion from the same quarter last year. Net income decreased 78% from the same quarter last year, but this is due to projects (Kemper plant) to produce cleaner energy. The Southern Company (NYSE:SO) is focused on increasing its role in tomorrow’s energy landscape through cleaner energy production and higher margins.