I don’t usually write about utilities, for one simple reason: they usually don’t yield enough. Fortunately in recent months, investors have tossed out some perfectly good utility dividends, asserts dividend expert Brett Owens, editor of Contrarian Income Report.
An example of a strong utility pick is regional utility Exelon (EXC), whose electricity and gas businesses serve 10 million customers, mostly in the US Northeast.
Savvy investments under CEO Chris Crane have nicely shifted Exelon’s power mix toward renewables. That helps it stay within environmental regulations, which are likely to be strengthened under a Biden administration.
At the same time, Exelon has invested heavily — to the tune of $4.5 billion this year alone — to make its operations more robust. That’s helped it steer through 2020’s active storm season.
Despite the storms and COVID-19, Exelon boosted its full-year earnings guidance to $3 to $3.20 a share when it reported third-quarter earnings, a big jump from its previous forecast of $2.80 to $3.10.
The company shifted from paying a static dividend four years ago to delivering steady payout growth. That rising payout has helped pull the shares higher—until this year, that is, when investors inexplicably sold off the stock.
With Exelon’s rising earnings and healthy balance sheet (long-term debt is a reasonable 31% of assets), it’s nicely positioned to drive its dividend (and share price) higher.
Exelon sports a 3.6% yield today, and a five-year beta rating of 0.42, making it 58% less volatile than the market. In a world where Treasuries yield just 0.8%, a growing 3.6% dividend backstopped by a steady share price has a lot of appeal. Expect investors to catch on to that and bid Exelon’s shares back up.
In addition, you can bulk up your dividends even more when you buy utilities through a closed-end fund like the Reaves Utility Income Fund (UTG). This fund gives you access to top US utilities like WEC Energy (WEC), NextEra Energy (NEE) and Comcast (CMCSA).
It also diversifies your utility holdings beyond America, with 22% of its portfolio in Canada, including power provider Fortis (FTS) and BCE Inc. (BCE), our northern neighbor’s main telecom provider.
Here’s something else you’ll like: UTG pays an outsized 6.6% dividend—and it makes that payout monthly. And its stability just about matches that of Exelon: with a five-year beta rating of 0.65, UTG is 35% less volatile than the market.
UTG does trade at a 0.65% premium to its net asset value (NAV, or the value of the stocks it owns), which may lead you to think it’s overpriced. But this fund regularly trades at much bigger premiums — as high as 12.8% last June — so we can expect some price upside from its growing premium, too.
