Utility stocks have soared this year. As measured by the Utilities Select Sector SPDR ETFthe average utility is up almost 30%. Add dividends and the total return is well over 30%.
As utility stock prices have risen, their dividend yields have fallen. However, there are still some very attractive options available if you know where to look. Black Hills (NYSE: BKH), Brookfield Infrastructure (NYSE: BIPC)(NYSE: BIP)And Brookfield Renewable (NYSE: BEPC)(NYSE:BEP) currently stand out to a few Fool.com contributors as three of the best, higher-yielding options in the utility space. That makes them great options for those looking to generate some dividend income.
The mighty little dividend utility
Ruben Gregg Brouwer (Black Hills): The average utility, using Utilities Select Sector SPDR ETF as a sector proxy, has a dividend yield of about 2.9%. Black Hills offers 4.25%. If you’re looking for high yields, you’ve found it here. But that’s not the only thing to like about Black Hills’ dividend. The regulated natural gas and electric utility has also increased its dividend for 54 years in a row. You don’t build a track record like that by accident, which is why there are so few Dividend Kings like Black Hills in the utility industry.
Don’t feel bad if you haven’t heard of Black Hills. It is a relatively small company. With a market capitalization of roughly $4 billion, it is less than half the size of the smallest utility in the S&P 500 Index. But this is a net benefit for small investors who do know about Black Hills (which now includes you). While everyone else focuses on industry giants, spend your time getting to know a high-yield utility company that is a “giant” when it comes to dividend consistency.
The dividend at Black Hills is supported by a customer base that is growing roughly three times faster than the U.S. population. And while earnings growth is expected to fall between just 4% and 6% per year, with the dividend likely to follow that number, that’s more than enough to not only keep pace with inflation, but also boost the purchasing power of the dividend in the to increase over time.
Of course, you’ll have to dig a little deeper if you want to follow Black Hills. But the extra return and dividend consistency will likely be worth it.
A historically cheap valuation
Matt DiLallo (Brookfield Infrastructure): Brookfield Infrastructure has underperformed compared to other utility stocks this year. Company shares (BIPC) are up 17%, while the limited company units (BIP) have gained only 8%. Because of that (and the company’s strong growth), it trades at a very attractive valuation today, especially compared to other utilities.
The company is trading bee Adjusted 14.1 times resources from operations (FFO). That is below the historical average of 15.5 and the average over the past five years of 16.5. That low valuation is why Brookfield Infrastructure currently offers such an attractive return (4.8% for BIP and 3.9% for BIPC), more attractive than the average utility, which yields around 3% these days.
Brookfield also offers better dividend growth potential (5%-9% annualized compared to about 4% for other utilities). Meanwhile, it offers a bigger degree of diversification (it operates utilities and other utilities in the transportation, energy and data infrastructure sectors) with lower risk, given its low exposure to consumers.
The company has that too strong in general growth potential. It expects to grow its FFO by more than 10% annually in the future. The significant exposure to the megatrend of digitalization (more than 60% of FFO) is one big factor driving this vision.
Brookfield’s utilities and gas infrastructure should benefit from rising energy demand. Meanwhile, utility-like data infrastructure platforms (semiconductor manufacturing, data centers, towers and fiber optics) will benefit from expected growth in computing power and data demand driven by megatrends such as artificial intelligence (AI).
This is one of the most attractive investment opportunities in the utility space these days. The company offers high growth potential and a high-yielding dividend at a historically low valuation. Therefore it could produce powerful achieve total returns in the coming years a great one stocks to buy now.
Renewable growth
Neha Chamaria (Brookfield renewable): Climate change increases the risk of energy security, one of the biggest reasons countries around the world are embracing clean energy. Renewable energy sources, such as wind, solar and water, are readily available and plentiful, with little or no greenhouse gas emissions.
Therefore, companies that generate electricity from renewable energy sources have strong growth potential. One of those companies is Brookfield Renewable, the renewable energy-focused brother of Brookfield Infrastructure. The company yields 5.3% for partnership units and 4.5% for its corporate shares.
Brookfield Renewable has a vast portfolio of hydro, wind and solar assets and massive utility-scale solar and wind development platforms with a presence in more than 20 countries. As is typical of most utilities, Brookfield last year sold a large portion, nearly 90%, of the renewable energy it generated under long-term, fixed-price contracts with an average contract term of 13 years.
The company acquires long-lived assets, operates them commercially with a focus on cash flow and dividend growth, and periodically divests some assets to finance growth. It plans to invest $8 billion to $9 billion in growth opportunities over the next five years, with the goal of growing annual FFO by more than 10%. Importantly, Brookfield is also targeting annual dividend growth of 5% to 9% over the period.
With Brookfield Renewable on track to have a record year, but the stock up just shy of 2% so far this year, it seems like one of the few dividend stocks you could even double right now. Because the cash dividends flow back, investors can expect larger dividends year after year, which should further increase their total return on the stock over time.
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Matt DiLallo holds positions at Brookfield Infrastructure Corporation, Brookfield Infrastructure Partners, Brookfield Renewable and Brookfield Renewable Partners. Neha Chamaria has no positions in the stocks mentioned. Reuben Gregg Brewer has positions in Black Hills. The Motley Fool holds positions in and recommends Brookfield Renewable. The Motley Fool recommends Brookfield Infrastructure Partners and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
After a nearly 30% sector rally, are there any high-yield utility stocks left? (YES, and here are 3 of the best!) was originally published by The Motley Fool
