Reaves Utility Income Fund (UTG) is a closed-end fund that owns utility sector stocks and pays an at...
Southern Company: Defense and Stability
02/03/2020 5:00 am EST
Utility stocks have posted impressive returns over the last two years; it is precisely that strength, however, that has some investors concerned that perhaps the game is over for the group, cautions Chuck Carlson, dividend reinvestment expert and editor of DRIP Investor.
To be sure, valuations are stretched in the group. And it feels that the next move for interest rates will be higher, which is typically not great news for interest-rate-sensitive utility stocks.
Still, the group has appeal for its stability and “defensive” characteristics. Thus, if you believe market activity will become more volatile in 2020, the group still has appeal.
One stock in the group that continues to move higher is Southern Company (SO). The stock recently moved to a new 52-week high. Despite the strength in these shares, the stock still throws off a dividend yield of 3.6%, roughly double the yield on the S&P 500 Index.
I don’t expect these shares to continue to crush the broad market, but I do expect them to provide a nice total return for growth-and-income investors. The stock ranks as a top buy in the utility sector.
Southern Company operates seven regulated utilities serving nine million customers in six states — Alabama, Illinois, Georgia, Virginia, Tennessee, and Mississippi. Electricity is generated via natural gas (50%), coal (22%), nuclear (16%), and renewables/other (12%).
The company also has businesses in the mobile-communications and fiber-optics markets. Wall Street seems to be growing more comfortable with the company’s two nuclear projects at its Georgia Power subsidiary.
One factor that should help the company’s long-term growth potential is the growth prospects for its service region. Through September, the firm added over 30,000 new residential electric customers and over 21,000 residential natural gas customers across the regulated utilities.
Customer growth continues to be driven primarily by strong job and population growth in its Southeast service territory. Dividend growth has been impressive. The company has boosted its dividend annually for 18 consecutive years, and I expect a dividend hike sometime in the first half of 2020.
It is possible that utility stocks, including Southern, will take a breather in the near term. However, investors should use price dips to acquire these shares. The combination of decent price appreciation and a dividend yield of 3.6% should afford suitable long-term returns for more risk-averse DRIP investors.
Please be aware that Southern offers a direct-purchase plan whereby any investor may buy the first share and every share directly. Minimum initial investment is $250.
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