A Stock For the Skittish

10/06/2008 1:00 pm EST


Richard Band

Editor, Profitable Investing

Richard Band, editor of Richard Band's Profitable Investing, finds a dividend-paying utility he thinks is a good place to put money now.  

It hasn't been an easy year for retirees and other income seekers who rely on dividends. High-dividend stocks have put in a disappointing performance for more than 18 months now, mainly because of the financial sector's woes.

Banks, insurers and other financial businesses pay a hefty 26% of the dividends doled out by the companies that make up the blue chip Standard & Poor's 500 index. Thus, it hurts when financials slash their payouts-as they've done in droves lately.

At this writing, 2008 is shaping up as the worst year since 1990, and perhaps longer, for dividend cuts. Compounding the injury, the share prices of outfits that pare their dividends also tend to take it on the chin.

That's the dark side of the story. The bright side is that companies beyond the financial sector have done a heroic job of increasing their dividends in 2008-utilities in particular.

While I expect to resume buying financials when their outlook stabilizes, for now I recommend that income investors channel most of their new money into utility stocks, especially telecoms and electrics.

At the moment, I'm finding the electrics more appealing. They're more insulated from competition than the telcos, and weather has less impact on their earnings than it does on gas or water utilities.

Despite these strengths (and a good record of dividend hikes in 2008), electric shares have taken a hit this year. In part, the reason may be that Wall Street fears an economic slowdown, which would curb industrial and commercial power usage. Also, some utilities earn a large fraction of their profits from selling power to other utilities in the wholesale market. Wholesale profit margins fluctuate widely, and of late they've been narrowing.

Based in Dayton, Ohio, DPL (NYSE: DPL) is a heartland-of-America gem. DPL burns mostly coal, which is far less vulnerable to supply disruptions (and overseas blackmail) than oil. Furthermore, DPL has gotten well ahead of the emissions-cleanup curve: The company is actually a net seller of emissions credits to higher-polluting utilities.

Debt levels are moderate, and falling as a percentage of DPL's total capitalization. Best of all, this outfit's dividend is very safe. Only about 53% of this year's profits will go out the door in the form of dividends, well below the average for utilities that focus on delivering electricity to retail customers. Its current yield is 4.5%.

If you're skittish about buying any stocks this month, DPL is one you should still consider. At only 11x next year's projected earnings, the downside appears to be minimal.

On the up side, a swing back to "normal" valuations in the 13x to 14x area could produce a 30% or greater capital gain-on top of your dividends-within the next 12 months. Buy DPL at $26 or less. (It traded Friday a little below $24-Editor.)

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