The utilities sector has done very well, with the Utilities Select Sector SPDR ETF (NYSEMKT:XLU) up about 35% in the past year. Utilities have actually done slightly better than the S&P500 index over that period. That’s good news for utility investors who bought a year ago, but if you’re an income investor looking at utilities now, there’s a bit of a problem. The sector currently yields only 2.7%. Don’t give up; there are still some attractive dividend-paying utilities.
How about a Dividend King with a yield of 4.3%? That would be so Black Hills (NYSE: BKH). Or what about a company that has paid dividends for 140 years in a row and offers a yield of 6%? That would be diversified UGI Corp. (NYSE:UGI). And both are accessible investment options, with shares trading well below $200 per share.
Black Hills is small but mighty
Most investors have heard of industry giants like NextEra Energy And Southern Company. But Black Hills, with a relatively small market cap of $4.3 billion, has long flown under Wall Street’s radar. That’s a shame, because little Black Hills beats its biggest peers where it counts for an income share: consistency of dividends. Unlike NextEra and Southern, Black Hills is a very elite Dividend King.
In addition to having increased its dividend for over 50 years (and counting), Black Hills also has an above-average dividend yield of 4.3%. So even after a rally in utility stocks, Black Hills will likely still be quite interesting for income investors. That said, there are good and bad things to consider here.
On the negative side, Black Hills has a significant debt load. That was a headwind as interest rates rose, causing management to pull back on its capital investment plans (which means slower growth). But now that interest rates are starting to fall again, these headwinds don’t seem so bad anymore. On the plus side, this natural gas and electric utility, which serves roughly 1.3 million customers, has seen the number of customers in its operating regions grow nearly three times faster than the total U.S. population growth. With capital investments increasing in the coming years, management is targeting earnings growth of between 4% and 6% per year. The dividend will likely follow the higher earnings.
All in all, it seems like Black Hills is something of a hidden gem. If you don’t mind owning a somewhat unknown utility, you’ll want to get to know Black Hills and its attractive returns.
UGI’s dividend is leveling off for the time being
UGI is another, lesser-known utility, but that’s probably because, unlike the fairly traditional Black Hills, it’s more than just a utility. UGI owns electric and natural gas utilities, propane operations, an internationally focused liquefied petroleum gas business and midstream energy assets. It’s kind of a complex mix of a company with fingers in both the utility and energy sectors. However, it has paid a dividend every year for 140 years, so this is not a fly-by-night operation.
That said, UGI is in something of a transition period. The company aims to strengthen its balance sheet and streamline its operations, with particular efforts to reduce operating costs. There is some uncertainty here due to the business reset taking place and investors have avoided the stock. That’s part of the reason for the large 6% dividend yield.
However, there is one more thing. Management is very clear that it plans to keep the dividend stable until at least 2026 as it prioritizes debt reduction. But if all goes according to plan, the dividend should grow at around 4% per year in 2027 and beyond. If you don’t mind getting well-above-average returns from a company with a natural gas and electricity supply, then UGI is worth a deep dive today because it works via a business reset.
A little extra risk for a lot of extra reward
Both Black Hills and UGI carry more risks than larger and better-known utilities like NextEra and Southern. But you get paid very well to take on the extra risk in the form of higher dividend yields. If these were companies with terrible dividend histories the story would be different, but Black Hills is a Dividend King and UGI has a 140 year history of paying dividends. If you look into it, the extra risk does not seem so extreme.
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*Stock Advisor returns October 14, 2024
Reuben Gregg Brewer holds positions at Black Hills and Southern Company. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
Two No-Brainer High-Yield Utility Stocks You Can Buy Right Now for Under $200 Originally published by The Motley Fool
