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No Big Deal If You Are A Dividend Growth Investor. Join Seeking Alpha to get real-time alerts on your favorite authors. Rising interest rates and a falling market have contributed to a sell-off of utility stocks, with many reaching bear market territory. This article provides an update of my thirty-stock watch list and presents my top ten picks for dividend growth and income. It’s been sixteen months since I presented my list of 2017’s Top 10 Utility Stocks For Dividend Growth And Income.
A lot has happened during that time, including the inauguration of a new U. However, once interest rates started to rise in late Q4 and into 2018, the utilities dropped, giving up all of their gains from 2017. They’ve started to recover a bit the last few months, but are still well below former highs. The utility sector was quite expensive when the last update was published, so the fact that it underperformed the overall market isn’t all that surprising.
Even worse, that valuation is being calculated based on 2017 EPS estimates, meaning investors are not only “paying up” at today’s prices, but they are also doing so on a forward basis as well. This isn’t to mean the utility sector is completely devoid of opportunity, but my expectations going forward remain guarded. As shown in the chart above, despite the price premium, the market continued to ignore valuations for utilities for another nine months following that article. My picks performed in a similar fashion, as they’ve increased in share price by just 2. Keep in mind, the selections made were based on future dividend income expectations, not price.
Considering all the picks have continued to pay and raise their dividends, and had an attractive average yield of 3. I’m okay with how they’ve performed. The Updated Watch List I made a couple of changes to the watch list with this update, dropping Avista Corp. SCANA is mired in problems from its failed nuclear power plant project, which led to its agreement to be acquired by Dominion Energy, Inc.
Both deals are still waiting for final approval by regulators, and in the case of SCANA there is the possibility of the deal not going through. Thus, with the uncertainty surrounding them, I decided to act now to find new replacements for the watch list. The first replacement, Pinnacle West, is an electric utility based in Phoenix, Arizona. The second replacement, ONE Gas, is a natural gas utility based in Tulsa, Oklahoma, that provides distribution services to more than 2 million customers in Kansas, Oklahoma, and Texas. The company has raised the dividend on an annual basis since it began trading in 2014 after its spin-off from ONEOK, Inc. Meanwhile, seventeen of the thirty companies are in correction mode, and three companies – Black Hills Corp. Of course, price relation to 52-week levels is fairly meaningless, as that doesn’t necessarily equate to a stock trading at a good value.
In the next part, we take a look at relative valuation compared to historical numbers and try to find some deals on the list. Historical Numbers and Analyst Estimates I have updated the spreadsheet with 2018 EPS estimates from F. Graphs and Yahoo Finance, and will now look at how these valuations compare with historical levels. E was found by looking at various time frames on F.
Graphs to determine what earnings multiple each company typically trades at. E” to show a relative valuation. In this case, a negative number is good, as that means shares are currently trading below the fair value number. I’ve also updated the historical dividend growth information for each company from David Fish’s U. Dividend Champions spreadsheet to show how the various companies compare to each other by dividend growth rates. I also find this information useful as a quick way to see how dividend growth rates have progressed over time, and if current growth rates are higher or lower than the recent trends.
The deepest value is Dominion Energy, which is actually 13. Meanwhile, the two utilities being acquired in mergers have the most overpriced shares, with Vectren at 36. Income and Total Return Projections Current yield is an important metric for investors, but its importance is sometimes overstated. For those who don’t immediately need the dividends for income, or for those who have a longer time frame needing the income, a higher growth rate on a smaller dividend can quickly result in a higher income for your portfolio. This next table will show my projections for future income for each of the members on the list. I do this by searching through company conference call transcripts and presentations and looking at historical payout ratios, along with analysts’ EPS growth projections to predict what the dividend growth rates over the next few years could be. The numbers are also used along with the EPS growth estimates and the “Delta PE” number to project the total and annualized returns over the next five years.