High yielding utility common stocks have become more difficult to come by the past few years as share prices have risen. And a number of companies are now focused on share buybacks rather than raising dividends, observes Roger Conrad, editor of Conrad's Utility Investor.

My cardinal rule is high dividends don’t endure long unless they’re backed by a healthy, growing business. And the best evidence of that is a Quality Grade of “A” or at worst “B,” along with a consistently growing payout.

My favorites that meet these qualifications are a trio of energy midstream companies currently in our model portfolio that trading well under my highest recommended entry points: Kinder Morgan Inc. (KMI), Pembina Pipeline (PBA) and TC Energy (TRP).

These stocks have lagged long enough for more than a few investors to give up on them entirely. But ironically, the burden of proof is increasingly on the bears for why these companies continue to deserve such severely discounted valuations.

All three reported free cash flow after CAPEX and dividends at what’s arguably a low point in the energy cycle for system volumes. And management has used that surplus to make their balance sheets the strongest in years.

As a result, there’s basically no risk of dividend cuts, even as yields are at historically high levels relative to other income investments. And all three are likely to increase payouts in the next 12 months.

The bear case is that cash flows will dry up and asset values diminish as the world weans itself off of fossil fuels, and in the meantime ESG-focused investors will dump their stocks.

The world, however, still lacks affordable alternatives to oil and gas, which arguably have yet to reach peak demand. And the cycle governing prices is now shifting up, as several years of record low investment increases scarcity of supply even as demand recovers from the pandemic.

That at a minimum argues for at least one more big party in oil and gas stocks that even the ESG-minded will have to find ways to participate in. And these increasingly cash-flush companies still have decades to transition their systems to CO2-emissions free alternatives, including renewable natural gas harvested from farms, fossil fuel-derived blue hydrogen, green hydrogen and even the elusive Holy Grail of economic carbon capture technology.

Since early 2020, 80 plus North American midstream companies have cut their dividends. In contrast, Kinder, Pembina and TC Energy have raised payouts while adding strategic assets with a combination of acquisitions and construction.

That’s as sure a test of utility-like resilience in a difficult environment as you’ll find in any industry. Kinder’s a buy up to $22, Pembina below $38 and TC Energy to $50.

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