4 Great Utility Stocks for Dividend Investors

If you listen to the naysayers, you’ll steer clear of utility stocks. As bears point out, low power prices are pinching profits for companies that sell electricity to the grid. Businesses and consumers are using less electricity, spurring utilities to try to jack up fees to make up for lower revenues. Higher interest rates may be on the horizon, potentially raising utilities’ borrowing costs and making the stocks less attractive relative to other income-oriented investments. Nor is the sector cheap. Despite a 6% slump this year, the utilities sector trades at 15.7 times estimated year-ahead earnings, above the 10-year average of 14.4, according to research firm FactSet.

The sector produced positive total returns during the last three periods of Fed rate hikes, says David Burks, a utilities analyst with investment bank Hilliard Lyons in Louisville, Ky. One of Burks’s top picks for income is PPL (PPL, $34.28, current yield 4.4%). Based in Allentown, Pa. Also attractive for income is Duke Energy (DUK, $73.70, 4.5%). The nation’s largest electric power company, with nearly $24 billion in revenues last year, Duke sells electricity to 7.3 million customers in the Southeast and Midwest. NextEra Energy (NEE, $103.94, 3.0%) doesn’t yield as much as Duke or PPL, but it has more potential for dividend growth and higher total returns. ITC Holdings (ITC, $33.75, 2.2%) yields less than most utilities and, at a bit more than 16 times estimated year-ahead profits, is a bit more expensive. But it’s one of the most profitable utilities, with greater prospects for dividend hikes and share-price gains than most of its rivals.

Source: Kiplinger

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