It’s a low-yield world. And we’re all just living in it. The S&P 500 yields a lowly 1.35% as I write this article. In terms of income, that’s just not gonna get the job done unless you have millions of dollars in stocks.
But there are a number of stocks out there offering yields way higher than that. And you don’t have to chase yield on low-quality stocks to get your hands on some of this income.
In fact, there are a number of high-quality dividend growth stocks that pay safe, growing dividends – and their yields are much higher than 1.35%.
Utilities are a great example of this. We can’t live without electricity. It’s a service that has built-in demand. And so utilities that reliably provide power also reliably produce profits.
And they reliably pay out big, growing dividends. Today, I want to tell you about three high-quality utility dividend growth stocks yielding 4% and higher. Ready? Let’s dig in.
The first stock I want to tell you about is Algonquin Power & Utilities (AQN).
Algonquin is a renewable and regulated utility conglomerate with a market cap of $11.5 billion.
This Canadian utility is super interesting. Whereas most utility businesses are geographically locked into one service area, Algonquin has assets all across North America and even some international assets, namely in Chile and Bermuda. This mitigates their regulatory and natural disaster risk, since they’re not overly exposed to any one region.
If you want your energy as green as those dividends, Algonquin should definitely be on your radar.
55% of their generation capacity is comprised of renewables. And the company is aiming to get that number up to 75% by 2023. This is one of the greenest utility businesses I know of. But wait. There’s more. They also have a water and wastewater utility business. While a lot of other green utility and water utility stocks trade at high multiples and offer low yields, Algonquin doesn’t. I think that’s an opportunity.
This stock yields 4.5% – that’s more than three times higher than the broader market’s yield.
And the valuation, in my view, is reasonable.
That’s particularly so for a stock that’s compounded at an annual rate of nearly 15% over the last decade. Based on adjusted EPS, we’re talking about a P/E ratio of 23. That’s high compared to a normal utility. But compared to other faster-growing utilities, especially across green energy and/or water, that’s not high at all. This is a compelling long-term idea for dividend growth investors after dropping 7% YTD.
The second utility dividend growth stock you should take a look at is Southern Co. (SO).
Southern is a gas and electric utility holding company with a market cap of $65 billion.
This is one of your traditional big American utility businesses. It’s the second-largest utility in the US, based on its customer base. Their massive size gives you stability. Their nine million customers across six different states pay their bills and count on Southern to provide reliable power.
That massive economic ecosystem is what leads to big profits and big dividends.
Southern is doing more than $20 billion in revenue per year. And a lot of that revenue distills down into net income, which largely gets returned to shareholders in the form of a fat dividend. No, it’s not growing like crazy. Instead, this is a steady-eddy utility that you can sleep well at night owning. It slowly plods along with ever-higher revenue and earnings per share over the long run. Instead of big growth, you get big income.
The stock yields a mouth-watering 4.3% right now.
This stock is not extremely cheap, so look for any kind of pullback as a chance to pull the trigger.
In my view, this stock’s valuation is slightly above fair. The P/CF ratio, for example, is 9.3. That’s a bit above its own five-year average of 8.9. And the 4.3% yield is a tad lower than its five-year average of 4.5%. The P/E ratio, at over 19, is a bit high for a slower-growing utility, in my opinion. A 5% pullback would be enough to put this stock at a 4.5% yield, which could make it buyable. If you want a large utility business to give your portfolio a high level of stability and a juicy yield, Southern is a name to keep in mind.
Last but not least, let’s talk about Pinnacle West (PNW).
Pinnacle West is a utility holding company with a market cap of $9.5 billion.
This is the smallest utility business I’m featuring today. But don’t let its size fool you. This utility packs a punch. What I think is really appealing about it is the location in which it operates. The company principally serves as the parent of Arizona Public Service, Arizona’s largest and longest-serving electric utility. With Arizona growing in population like gangbusters, that means more utility customers, higher revenue, higher profit, and higher – you guessed it – dividends.
This stock’s market-smashing yield is right at 4%.
So that yield is slightly lower than Southern’s yield. But check this out. They’ve increased their dividend for a decade straight, with a 10-year DGR of 5.8% – which is way higher than what Southern shareholders have gotten. The higher dividend growth rate is possible because Pinnacle has produced a higher bottom-line growth rate over the last decade. And based on their service territory, I think that outsized growth is set to continue.
Another thing to consider is that Pinnacle West is due to increase their dividend with the next dividend declaration in October. Southern already increased their dividend for the year. So Pinnacle’s yield isn’t necessarily all that much lower than Southern’s on a go-forward basis.
This might be the cheapest stock on this list.
Southern appears to be a bit overvalued. I see Algonquin as reasonable. But Pinnacle West definitely looks undervalued across the board. The P/E ratio is below 17. That’s not bad at all when you look at the historical growth and potential future growth. In fact, we recently put out a video showing how the intrinsic value for the stock could be over $89/share. With the stock at less than $84/share now, there’s some nice upside there – and that’s on top of the juicy 4% yield you collect while you wait for that upside to manifest itself.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
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