I currently only own one true utility in my DG portfolio, NextEra Energy (NEE) and it has had a nice run. I purchased about 40 shares in 2011 for an average of $54.79/share. The shares are currently at $67.92/share or an increase of 22.8% from my purchase price. They also currently only yield 3.53% which is a little low for a utility. The lower yield and increase in price is the main reason I haven't added additional shares, I think there are better values in the market.
Here's a quick snapshot showing a few metrics of 5 utilities I'm familiar with and an additional 3 that are dividend champions that I'm not very familiar with. There are certainly a lot of other utilities out there and a lot of other metrics to look at but I just wanted to compare a few.
DUK
|
SO
|
NEE
|
AEP
|
EXC
|
MGEE
|
UGI
|
UVC
|
|
Yield
|
4.97%
|
4.59%
|
3.58%
|
4.48%
|
7.05%
|
3.17%
|
3.25%
|
4.91%
|
Payout
|
83.48%
|
75.23%
|
45.89%
|
63.14%
|
138.76%
|
56.3%
|
61.36%
|
70.55%
|
TTM P/E
|
19.57
|
16.88
|
13.11
|
14.04
|
15.90
|
18.16
|
19.46
|
14.46
|
Years Inc.
|
8
|
11
|
18
|
3
|
0
|
36
|
25
|
52
|
5-year CAGR
|
6.2%
|
4.1%
|
8%
|
3.57%
|
N/A
|
1.8%
|
8.1%
|
2.4%
|
10-year YOC
|
9.07%
|
6.86%
|
7.73%
|
6.36%
|
N/A
|
3.79%
|
7.08%
|
6.22%
|
The last metric is a 10-year Yield-on-Cost (YOC) that I like to be at 10% or higher. I talked about how I calculated it in a post here. None of the stocks meet this criteria. The closest is Duke but I've used the 5-year CAGR to calculate it. Their 1-year and 3-year CAGR's are much lower.
For example: DUK has a 5-year , 3-year and 1-year CAGR of 6.2%, 3.2% and 2.1% respectively. So their dividend increases are getting smaller (percentage-wise). This isn't a good sign and something I watch closely with all of my stocks.
Let's look at a stock that is not a utility that I added to recently. I recently added additional shares of MCD. They have a current yield of 3.56% and a 5-year, 3-year and 1-year CAGR of 20.4%, 15.9% and 11.9% respectively. I don't expect a huge company like MCD to keep a 5-year CAGR of 20.4%, the dividend increases have actually been smaller most recently as implied from their 3-year and 1-year CAGR's.
Let's calculate what MCD's dividend growth rate needs to be in order to achieve a 10-year YOC of 10%.
The formula I use is (1 + DGR) ^ 10 * Current Yield = YOC (in this case 10%)
=> (1+DGR) ^ 10 = (.10 / .0356)
=> {using natural logs}
=> 10 LN (1+DGR) = LN (2.809)
=> LN (1+DGR) = [LN (2.809) / 10]
=> {using fact that e^[ln(x)] = x}
=> 1 + DGR = e ^ (.10328)
=> 1 + DGR = 1.1088
=> DGR = .1088 or 10.88%
You can actually check this by computing (1.1088) ^ 10 * 3.56% = 10%
So MCD needs a DGR of 10.88% for 10 years in order to have a 10-year YOC of 10%. This number is lower than the 1-year, 3-year and 5-year CAGR's so I like this bet.
Conclusion: While I feel that utilities do belong in a DG investor's portfolio, I believe there are better DG stocks to purchase currently for the long-term such as McDonald's.
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