When you think of a rudder what comes to mind? A boat of course, or perhaps sailing. When I think of a rudder I think of stability, a force that continually rights any wrong path and generally keeps things steady. That being said, I have always favored utility stocks as my rudder in my investment portfolio. Currently, I own three such rudders, Southern Company (SO), Consolidated Edison (ED), and Dominion Resources, (D).
While utilities in general are not high growth businesses they do offer tremendous stability in almost any investing environment. After all, what would we be doing without electricity? Electricity is one commodity that will always be in demand, whether generated through coal, nuclear, hydro or wind. For me, this knowledge is priceless as a dividend income investor. Let’s take a little closer look at my three rudders.
First off, we have Southern Company. An electric utility that operates primarily in the south of the U.S. The company is involved in the generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources in the states of Alabama, Georgia, Florida, and Mississippi. While not a gang-buster for forward growth, as most utilities are, it does sport a nice 4.50% yield with a 12 plus year history of dividend growth. Boring, perhaps. Consistent high yield, yes.
Next we have Consolidated Edison (ED) an electric, gas, and steam delivery businesses serving New York City and environs. Consolidated Edison sports hefty 4.33% yield with an impressive 39 years of dividend growth. Can you imagine the compounding effects of an investment made in ED decades ago?
Finally, we have Dominion Resources, (D) which is another utility that produces and transports energy primarily on the east coast of the U.S. D offers patient investors a nice 3.30% yield with about 5 years of dividend increases. It’s easy being patient with most utility stocks because of their high yield. Don’t worry about these yields being too rich. Each company mentioned has very acceptable payout ratios that can almost ensure dividend increases going forward.
What do you think about adding utility stocks to a dividend portfolio?
Disclosure: Long SO, ED, D
8 thoughts on “Utilities Are My Portfolio Rudder”
I had the same thought too when starting out last year, though I included a water company too since I figured everyone needs water and it covers ~ 70% of the planet. I picked LNT, GXP and AWR for my portfolio, plus Vanguard’s Utility ETF when I was being lazy and didn’t want to commit to a single stock.
Utilities are awesome. Little to no growth but talk about your steady dividends through thick and thin. I love water as well. I actually have 3 on my watch list, AWR, WTR and CWT. Your picks of LNT and GXP look interesting as well. I just decided to go with more large cap type utilities. I’m curious to know how your ETF is working out. Personally, I’d rather buy several individual stocks and create my own “ETF.”
I did consider ED originally too (this was back in Q1-2013) but decided against them as their debt-to-capital ratio was quite high. Likewise AWR won out for me against WTR because of lower debt. I didn’t mind reducing market cap requirements for utilities since I think they’re fairly stable and don’t have much competition in their area.
I completely agree with you about the personal ETF; however since I’m targeting around 4 stocks in each of 10 market sectors (utilities being one), the utility sector ETF was a easy way of extra diversification. It’s VPU from Vanguard, commission free to buy/sell and has an expense ratio of 0.14%. My yield on cost from last year has been about 4%. It represents ~ 30% of my position in Utilities, so I will be favoring individual stocks over it going forward.
I hear you about ED’s debt. In fact a lot of utilities carry high debt loads but I guess it’s their business that they are in that keeps them around. It’s just something we all need and use to live daily. 30% of your total portfolio is in utilities? That’s a pretty conservative move. For me, in my brokerage account, utilities are just under 7% of my holdings. I think about 10% as a “rudder” is about right.
Sorry, I meant to say that Utilities overall form ~10% of my portfolio (it’s 1 of 10 sectors that I want to equally weight), and that the ETF is 30% of that 10%.
Agree that debt’s not necessarily a bad thing, and ED’s been raising its dividend for nearly 4 decades so it’s obviously doing something right! 🙂
Utility Companies have a reputation for steady dividends…we have a few utility company stocks in our watch list (SO is one of them). Great long term holds and great for anyone looking for consistent dividends.
That’s exactly how I view utilities. Boring, no high fliers in that sector, at least with the large cap ones, just good old quarterly payments. It seems these days a lot of folks are going for something more secure as I have seen the PE’s of my utility holdings really jump in the last year.