Duke Energy Corp (DUK) and Random-Chance Utility Investing

But growth CAN happen

Dominion Resources, Inc. (NYSE:D)

12-Month Gain P/E EPS Dividend Yield Net Margin
17.16% 106.55 0.57 3.69% 2.68%

The above isn’t to say that you can’t make a solid gain in utilities. It’s just that waiting for gains in utilities can make you a bit nervous.

Dominion Resources, Inc. (NYSE:D) is in solid growth mode in anticipation of its natural gas holdings and capacity paying off big time as the U.S. undergoes the fracking revolution. That’s led to an investment where the growth keeps up with the S&P over the last year and there’s a solid 3.69% dividend. It’s hard to knock that until you dig a bit deeper. Dominion Resources, Inc. (NYSE:D) is sitting on a P/E of 106.55–that’s far enough out of line for a utility to tell us that it’s been overbought – especially given a weak net margin for 2012 – that the value may be factored in already. Stick with investing in Dominion Resources, Inc. (NYSE:D) for the dividend. It would be unwise to count on runaway growth at this point.

American Electric Power Company, Inc. (NYSE:AEP)

12-Month Gain P/E EPS Dividend Yield Net Margin
32.39% 20.11 2.54 3.84% 8.15%

Sometimes, though, one can find a utility that does look like it can deliver both growth and income. In its 12-month, 5-year and 10-year performance, American Electric Power Company, Inc. (NYSE:AEP) has never been less than -1% on the S&P and most likely outperforms by quite a bit. The company is well-poised to take advantage of the natural gas revolution, but it’s not yet overvalued as it’s P/E is staying in the reasonable 20.11 level.

The dividend income is there for American Electric Power Company, Inc. (NYSE:AEP), too. While it’s been higher, even with the recent erosion of yield brought about by share gains, it’s still right below returning 4%. For income investors hoping to take money out of their stocks, American Electric Power Company, Inc. (NYSE:AEP) is a good choice that combines both income and a steady chance to outgrow the market as a whole.

Making the market

Utilities are affected by nature, as there is always the potential for demand to be affected by weather. Moreover, in an industry as highly regulated as electric utilities, profit isn’t guaranteed. There is, however, a good track record of companies being able to convince their state regulators that prices need to go up when costs do. That means there’s a limited profit upside, generally, but also a limited downside. That’s why you should be looking at utilities as income opportunities and not as growth plays.

The article Duke Energy and Random-Chance Utility Investing originally appeared on Fool.com.

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