If anyone needed a reminder of how essential utilities are to our lives, the recent devastation from hurricanes should make their importance plain, notes Elizabeth Blessing, contributing editor to Investing Daily's The Complete Investor.
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We count on utilities to provide us with light, power, heat, air conditioning, and water. When any disaster disrupts the flow of these basic necessities, our reliance on utilities is made crystal clear.
And it explains why utilities have long been a natural choice for the long-term income investor looking for safety and dependable yields.
Longtime holding Aqua America (WTR) is a good example of a mature and fundamentally strong utility that pays investors a reliable and growing dividend.
The company recently announced a quarterly cash dividend of approximately $0.20 per share, an increase of 7 percent compared to the June dividend.
While at 2.4 percent the yield is on the low side for our holdings, we’re satisfied with the company’s commitment to shareholders; Aqua has paid a consecutive quarterly cash dividend for more than 72 years, and the latest increase is the 27th in the past 26 years.
In common with the utility sector in general, Aqua also has shown strong stock market gains in recent years. Its year-to-date share price is up 14.4 percent, while shares have risen 73.5 percent over the last five years.
This strength in Aqua’s shares, as for the sector in general, of course, has come in the context of the low interest rates that have prevailed in recent years. Going forward, a risk is that if interest rates rise, we could see the appeal of utilities lessen as some investors turn to other interest-paying choices such as bonds.
The other risk with higher interest rates is that they increase the cost of capital for utility companies, which regularly need to make significant expenditures to maintain and upgrade their facilities.
Even in a higher interest rate environment, however, we see utility fundamentals remaining strong for dividends and earnings growth for the foreseeable future.
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In part that’s because as government-regulated entities, utilities have little competition and hold a near-monopoly grip within their service areas. The government regulates the rates they are allowed to charge and determines the returns they are allowed to make on their infrastructure investments.
So unlike most companies, which invest in capital improvements in the hopes of turning a profit, utilities generally know in advance what the allowed return will be, which they will receive via future rate increases passed along to customers. The national average for allowed return on equity for utility companies is 10.1 percent. Aqua America remains a buy.
