Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn’t sustainable. In others, the dividend is so low, it’s not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we’re going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn’t to say that these stocks don’t share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week’s selection.
This week, we’ll turn our attention to the electric utility sector, home of many great dividends, and take a closer look at why Entergy Corporation (NYSE:ETR) could be a great income play you can buy right now.
Utilities’ short circuit
The great thing about utility stocks from an income perspective is that energy is a basic need. In many cases, whether the economy is booming or in a recession, energy demand will remain relatively constant. But the utility sector has also greatly underperformed the overall market since the recession because of a number of factors, including the proliferation of cheap natural gas and the high ongoing expenses of operating nuclear facilities.
Source: Wikimedia Commons.
Exelon Corporation (NYSE:EXC), the nation’s largest nuclear power operator in the U.S., is a good example of a utility that’s struggled to compete. Despite being a cleaner form of energy than coal, nuclear power, without any subsidies, will continue to run consistently higher in terms of costs than nearly every other fuel source. These higher costs have actually pre-empted some utilities to close their nuclear facilities even earlier than expected. Entergy Corporation (NYSE:ETR), for instance, recently took a $240 million charge in the second-quarter to put a nuclear facility in Vermont into early retirement.
Another issue has been the declining price of natural gas, which has made more traditional forms of electric-generation like coal more costly. Duke Energy Corp (NYSE:DUK) recently announced that it, too, will be closing five of its Indiana-based coal-fired plants early because the costs to maintain them was simply too high to justify keeping them open. FirstEnergy Corp. (NYSE:FE) made a similar announcement last year by retiring six of its coal-powered plants. FirstEnergy Corp. (NYSE:FE) blamed environmental regulations for the closure of its six facilities, but I have to think that the higher costs of coal relative to natural gas had to play a role as well.
The Entergy advantage
The first thing that Entergy Corporation (NYSE:ETR) has going for it, that I touched on earlier, is that utilities offer an abundant but necessity resource: energy. Energy demand is relatively consistent regardless of the economic environment, which often translates into steady earnings and cash flow generation.
The past quarter for Entergy Corporation (NYSE:ETR) was a little bit of an anomaly, because it was given such a dramatic tax break in 2012 because of storm cost financings in Louisiana. With those tax breaks now removed, it looks as if Entergy had a miserable second quarter, reporting just a $0.92-per-share profit versus last year’s $2.06. However, this couldn’t be further from the truth. Electric revenue actually rose by nearly 13% year over year with a modest increase in decommissioning and power costs chipping away at its revenue increase. In other words, it’s business as usual for Entergy!