A Better Utility for Dividend Investors

Focus: STOCKS

Charles Carlson Image Charles Carlson Editor, DRIP Investor

As investors lap up any stock with a dividend, utilities have been a very popular sector but there's more to a dividend yield than the amount it throws off, as Charles Carlson points out in DRIP Investor.

Utility stocks are a favorite investment area for dividend and DRIP investors. Utilities tick off two important boxes for investors:

 

 

  • high cash flow/yield
  • moderate volatility.

The popularity of utilities has pushed many utility stocks sharply higher over the last year. This strength in utility stocks begs the question—is the group overvalued?

Providing fodder to the idea that the group is overbought, most utilities have mediocre to just plain lousy scores in our Quadrix stock-rating system. For example, the average Quadrix Overall score for the 54 utilities is just 41 out of a possible 100.

Another potential headwind for the group is the possible change in tax laws regarding qualified dividends. Unless the Bush tax cuts are extended, the tax on qualified dividends jumps from a maximum 15% in 2012 to a taxpayer’s ordinary tax rate, which could be as high as roughly 40% in 2013 depending on income. This “fiscal cliff ” has potentially onerous implications for dividend stocks, such as utilities.

So investors should dump their utilities, right? Not so fast. As is usually the case, it is dangerous to throw the baby out with the bathwater.

Yes, there are utilities that are probably not worth owning, but there are also utilities that should continue to see solid investor support.