Do you think that utility stocks are boring? Consider this. As of Friday, December 26, Fidelity MSCI Utilities (FUTY) , an index that tracks the performance of U.S. utilities, had returned 30% for the year, more than double the S&P 500’s 13% year-to-date return. .
With the economy expected to strengthen next year, some pundits are telling us that it’s too late to buy utilities. They say that utilities underperform in a strong market. Not so. My research found that, as a group, utilities typically keep up with the S&P 500 in strong markets, plus shareholders collect steady dividends, whether or not the market performs as expected.
All that said, as a group, utilities, operating in mostly stable markets, are unlikely to repeat the spectacular returns they enjoyed in 2014.
However, some will do much better. I am going to tell you about four utilities with the potential to produce unusually strong earnings and dividend growth in 2015.
For three of them, the catalyst is the same. They’ve recently moved natural gas pipeline assets that they’ve owned for years into tax-sheltered master limited partnerships (MLPs) that they control. The advantage of doing that is MLP’s are tax-sheltered, meaning that their profits are not taxed at the corporate level. The cash flow received from their new MLPs will directly add to each utility’s dividends. Here’s the scoop on those three utilities.
Growing by MLP
CenterPoint Energy (CNP) :CenterPoint delivers electricity and natural gas to customers in Texas and in five other states. CenterPoint also previously owned natural gas pipeline systems. But in 2013, it contributed its natural gas pipeline assets to Enable Midstream Partners ($ENBL), a joint venture with OGE Energy Corp. (OGE) and ArcLight Capital Partners. Enable owns interstate pipelines in four states and CenterPoint owns 59% of Enable. CenterPoint intends to pay out as dividends 60% to 70% of its utility sustainable earnings and 90% to 100% of after-tax distributions received from Enable Midstream. Its current dividend yield is 4.3%.
Dominion Resources (D) : Dominion serves electricity and natural gas customers nationwide. In October 2014, Dominion’s new MLP, Dominion Midstream Partners ($DM), sold 17.5 million new units in its IPO. The MLP's initial asset was an equity interest in Dominion Cove Point LNG, which owns liquefied natural gas import, storage, regasification and transportation assets. However, Dominion Resources recently agreed to purchase a 1,500 mile interstate natural gas pipeline system, which it plans to drop-down (sell) to its MLP in mid-2015.Dominion is currently paying a 3.3% yield.
NextEra Energy (NEE) : Formerly, FPL Group, NextEra operates regulated utility Florida Power and Light, and recently agreed to acquire Hawaiian Electric Industries, a regulated utility serving the Hawaiian Islands. NEE’s NextEra Energy Resources unit is a wholesale electricity provider that operates wind and solar energy power generation facilities in the U.S. and in Canada. In early 2014, NEE dropped-down many of its clean energy assets into a new MLP, NextEra Energy Partners ($NEP), which went public via an IPO in June 2014. NEE’s dividend yield is 2.9%.
Finally, the fourth utility that I’m going to describe generates electricity that it wholesales to other utilities.
NRG Yield (NYLD) : In July 2013, NRG Energy (NRG) , a nationwide electric utility, spun-off certain power generation and other assets into NRG Yield, which is a corporation, not an MLP. Those assets included wind and solar powered facilities, and conventional gas/oil fueled power plants. All have substantially all of their output contracted for on long-term fixed-price agreements to utilities or other credit-worthy parties. Thus, unlike conventional utilities which have large staffs to maintain transmission facilities, interface with consumers, etc., NRG Yield has low ongoing expenses. NRG Yield plans to grow its dividend from 15% to 18% annually by acquiring additional fully-contracted generation assets. Current yield 3.3%.
The stock market is fickle and utilities might move in and out of favor several times during a year. Thus, for best results, plan on holding any utilities that you buy for at least 12 months.
For more tips and information on the best utilities and dividend stocks, please check out Dividend Detective.