The utility sector rebounded strongly in 2024, with the average return on utility stocks falling from about 3.6% to the current rate of about 2.8%. Although that’s still better than the 1.2% you’d receive from the S&P500 index, you can do much better.
Even after a rally, for example Black Hills Corporation (NYSE: BKH) still yields about 4%. And Brookfield renewable (NYSE:BEP)(NYSE: BEPC) yields no less than 5.6%. Here’s why each is a no-brainer purchase for income investors.
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When it comes to utilities, Black Hills is about as simple as it gets. The company operates regulated natural gas and electric utilities, serving 1.3 million customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota and Wyoming.
The big goal is just to provide reliable power, and nothing else. Well, maybe apart from rewarding investors with reliable dividend growth, noting that Black Hills is a Dividend King with more than five decades of annual dividend increases under its belt.
In addition to being one of the few utilities to achieve the elite status of Dividend King, there is a list of things to like about Black Hills. For example, the regions in which it operates are experiencing population growth that is about three times faster than the total population growth in the United States.
More customers are a double benefit, as they bring in more revenue but also help support requests for more capital expenditure. As a regulated utility, Black Hills must seek government approval of its rates and spending plans. Currently, Black Hills has a five-year investment plan worth $4.3 billion. That’s quite significant, considering the company’s market cap of $4.6 billion.
The combination of population growth and spending is expected to help Black Hills grow its revenues 4% to 6% annually for the foreseeable future. Dividend growth is likely to track alongside earnings growth over time. So you get a historically high dividend yield of 4% and dividend growth of roughly 5%, which together means a total return of about 9%. Not bad for a boring little utility.
The next investment is not technically a utility, although it does generate and sell electricity. Brookfield Renewable is one of the world’s largest owners and operators of clean energy, selling power to businesses and utilities under long-term contracts.
It is somewhat unique in that investors can purchase a partnership share class with a 5.6% yield or a corporate share class with a 4.6% yield. They represent the same entity; the return difference is related to the question of corporate structure (e.g., institutional investors are often not allowed to enter into partnerships).
Brookfield is truly a one-stop shop for clean energy investments. Its portfolio includes hydro, solar, wind and nuclear energy and storage, and operations span North America, South America, Europe and Asia.
What’s a little unique here is that Brookfield Renewable is operated by Brookfield Asset Managementa major institutional money manager with a long history of investing in infrastructure assets on a global scale. Brookfield Renewable is essentially a way to invest alongside Brookfield Asset Management.
What that means on a practical level is that Brookfield Renewable’s portfolio is actively managed. It likes to buy assets when they are cheap, improve them (by recapitalizing them and improving their operations) and then sell them when they can get a good price. Then the process repeats. Yes, there is construction from the ground up, but even there the same opportunistic investment approach applies. Brookfield Renewable is pretty much the exact opposite of boring Black Hills.
That said, investors at Brookfield Renewable have been well rewarded on the dividend front. Management aims for annual distribution growth of 5% to 9%, with the rate over the past twenty years being approximately 6%. Add 6% to the dividend yield of around 5% and you get roughly 11%, slightly higher than the long-term return investors typically expect from the stock market.
Frankly, an investment in Brookfield Renewable probably carries a bit more risk than a regulated utility like Black Hills. But given the ongoing shift to clean energy, growth still appears to have a long way to go. All in all, the balance between risk and return seems to be tilting in favor of investors here.
Neither Black Hills nor Brookfield Renewable are as attractive as they followed the utility rally. But that shouldn’t stop you from looking at these two high-yield investments. They remain attractive if you’re trying to maximize the income your portfolio generates today and benefit from dividend growth later.
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Reuben Gregg Brewer holds positions at Black Hills and Brookfield Renewable Partners. The Motley Fool holds and recommends Brookfield Asset Management. The Motley Fool recommends Brookfield Renewable and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
2 No-Brainer High-Yield Utility Investments to Buy Now was originally published by The Motley Fool
