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Dividends4Life (38.26)

Utilities For A Well-Rounded Dividend Investment Portfolio

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February 26, 2009 – Comments (8) | RELATED TICKERS: ED , TEG , BKH

A well-rounded dividend investment portfolio just doesn’t happen by accident. As noted in Charlie Munger’s 10 Rules for Investment Success,  “Allocate assets wisely: Proper allocation of capital is an investor’s No. 1 job.” It is human nature to want to jump on the what’s hot bandwagon and ignore what is considered boring, like utilities.

Long considered the domain for “widows and orphans”, utilities have developed a somewhat stodgy reputation.  Why are utilities considered good for widows and orphans? Here a few reasons:

1. They are generally less volatile than the market as a whole (low beta)

2. Their products are something that people continue to need and use no matter what the economy is doing, thus

3. Their dividends tend to be more stable and secure

Utilities would be the perfect dividend income investment, except for one thing - they tend to have low dividend growth rates. As such, you wouldn’t want a whole portfolio of utilities and you need to be very selective in which utilities are added, and when they are purchased. In my personal allocation, utilities are limited to a maximum of 10% of my portfolio (currently, they make up 3.7% of my total investment portfolio).

In addition to the regular buy criteria, I look for a higher yield when buying utilities, generally greater than 5.5%, but I really prefer around 6%.  This eliminates many utilities, but there are still several from my Stock Ideas page that might be worth an additional look. Here is a list of all the utilities that have paid a dividend for more than 25 years and have a yield of 5.5% or greater:

Vectren Corp. (VVC) - 6.23% Yield
This energy holding company, headquartered in Evansville, IN, provides natural gas and electric energy to more than one million customers in Indiana and Ohio. It also offers energy related products and services to customers throughout the Midwest and Southeast. It has increased its dividend for 49 consecutive years. It last increased its dividend in November 2007.

Consolidated Edison (ED) - 6.29% yield
This electric and gas utility holding company serves parts of New York, New Jersey and Pennsylvania. With its February 2009 dividend increase, ED has now increased its dividend for the last 36 consecutive years. (most recent analysis)

Otter Tail Corp. (OTTR) - 6.35% yield
The company produces, distributes and sells electric energy in Minnesota, North Dakota and South Dakota and has interests in health services, manufacturing and other businesses. OTTR missed is normal dividend increase in February 2009. Instead, the company left its dividend flat with 2008. The last time OTTR increased its dividend was February 2008.

Integrys Energy Group (TEG) - 7.27% yield
This utility holding company serves about 485,000 regulated electric and 1,674,000 regulated gas customers. The company also operates an unregulated energy supply and services business. With its February 2009 dividend increase, TEG has now increased its dividend for the last 51 consecutive years. (most recent analysis)

Black Hills Corp. (BKH) - 7.48% yield
This diversified South Dakota-based holding company encompasses electric utility and integrated energy businesses. With its February 2009 dividend increase, BHK has now increased its dividend for the last 40 consecutive years. Prior to this last increase, the company went five quarter with no increase dating back to November 2007.

Of the five utilities listed above, I would not consider VVC and OTTR until the future dividend direction can be determined.  BKH’s late increase is a little concerning, but I could not disqualify it at this time.  I own and am currently purchasing  TEG and ED as their valuations and my allocations allow.

Finally, looking at current and some historic returns over shorter periods of time, certain utilities have done quite well. Remember, there is a reason the widows and orphans own them.

Full disclosure: Long ED, TEG

 

8 Comments – Post Your Own

#1) On February 26, 2009 at 7:37 AM, PrestonCheek (32.53) wrote:

Great read, thanks.

Mary, I hope you find this, you've been asking for this type of information.

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#2) On February 26, 2009 at 9:06 AM, FreethinkerKW (64.61) wrote:

Check the first video in this lineup:

 

http://rocktrueblood.blogspot.com/2009/02/bloomberg-on-how-to-avoid-foreclosure.html

 

p.s. I typed in all four stock tips form the video into my CAPS list which I use as a watchlist...

Two of them are beating the S and P by over 7% in less than a week.

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#3) On February 26, 2009 at 9:45 AM, Gemini846 (56.83) wrote:

Dividends4Life has a lot of good useful information here about real investing rather than trading. Dividends get represented in CAPS more like MLP's (percentage basis reduction) so the don't score as well as they would in real life.

Technically the SPY beats the SPY by 3% due to dividends.

Quick question: If you (or someone you knew) owned OTTR would you recommend they sell it and put thier money elsewhere, or is it a "hold" until future notice?

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#4) On February 26, 2009 at 11:24 AM, colonelnelson (42.68) wrote:

I agree with this analysis.

Though I took some criticism from some of my "savy" investing friends when I started buying it, my ConEd stock (ED) has been the only one of my individual stocks to hold its value during this downturn.

At one point, I was even up 5% with it, in this market!  (Now I'm down about 2%.)

I think that at under $40 it is a screaming buy.  JMHO.

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#5) On February 26, 2009 at 5:46 PM, Dividends4Life (38.26) wrote:

Unfortunately, as timing usually works. Last night TEG announced poor earning and dramatically lowered their full-year projection. I find this odd, since they just increased their dividends. Based on payout ratios quoted and their new projections, TEG could be in for a dividend cut. The sequence of these events will likely lead to some shareholder suits.

Best Wishes,

D4L

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#6) On February 26, 2009 at 6:34 PM, barich1 (46.74) wrote:

TEG got killed today, earnings report must not have been so good.  BKH is right at its 52 wk low too.  ED has been in the family holdings since before I ever traded, it always feels safe.

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#7) On February 26, 2009 at 6:57 PM, Seano67 (27.65) wrote:

Divvies4Life, how do you feel about PGN? And what are your thoughts on CEG?

I've held PGN for years and feel like it's done very well for me. CEG, not so much. I bought into that on 12/3/'08, and it's been an utter dog for me, compounded by the fact that it was 6 AM and I was in a big hurry when I placed the order and so I neglected to place a limit price on the order- and Murphy's Law working as it does, of course the stock rocketed upward in pre-market trading on news that CEG had accepted the bid from EDF, and thus I bought in at 29.90 when I'd intended to buy in under 25. Doh! :(

Anyway, I'm hearing that CEG may have some real problems, and I would love to hear your thoughts on these two companies. 

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#8) On February 26, 2009 at 8:30 PM, Dividends4Life (38.26) wrote:

I also hold PGN, but I have never been overly impressed with it. I have never looked at CEG. 

I am working on a  followup post to what happend to TEG. There are some interesting observations to made.

Best Wishes,

D4L

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