Micro Blog #25: Some Utilities are Wolves in Sheep's Clothing

In my previous post, I showed you how much these five (SO, D, DUK, ED, and PPL) utilities have paid in dividends over a 10 year period on a $10,000 initial investment.

In this post, I'm going to show you that not only you can earn more dividends over a long period of time, you can even beat the market in many cases by investing in blue chip dividend paying utilities.

Again, the data I'm using is from my favorite tool F.A.S.T Graphs and is drawn over a 19-year period. This is the maximum historical data we can get from this tool.

Pay attention to the data listed in Green fonts at the bottom of each of these tables. I will walk you through the first one which is the 19-year data on Southern (SO).

Initial Investment: $10,000
Time Period: 19 Years
Total Dividends Paid by SO: $11,204.41
Annualized ROR (w/o dividends): 2.1%
Growth and Dividends: $26,038.13
Total Annualized ROR: 5.1%


Did you notice? More than half of the total return is made out of dividends. This is the cold hard cash that is paid to investors every quarter for the past 19 years. The rest of the return is made out of the price growth which fluctuates with market volatility and can be taken away anytime.

Now, if you think that total return of 5.1% is nothing to be excited about, well S&P 500 has a return of 4.9% over the same period, while paying only $4162 in dividends. S&P data is listed in Red fonts.

So guess what? A slow growing slug utility like SO has beaten the overall market while paying 2.5x times more dividends. What do you think about that?

You want more total return, well look at Dominion or PPL with a total returns of 7.9% and 6.7%, respectively. These utilities hands down beat the overall market while paying investors more dividends in return.

Dividend is real cash folks! Some thing that cannot be taken away by the stock price or market fluctuations. Whereas price appreciation is unrealized gain till you actually sell an asset/stock.

Are you going to sit on a growth stock for 20 some years hoping to cash out a huge paper gain at the end? What if the market crashes or worse company goes out of favor or even bankrupt or you are forced to sell at a low point? How much total return would you get after waiting for years? Answer is not much and could very well be Nil, Zero, Zilch!

If you were investing in dividend stocks, even slugs like utilities, you would have been earning a sizable portion of your return in cash every quarter, every year, and even if something were to happen to the stock or the company, you still end up with dividends in return.

So, if you are a young guy and you want to invest for the very long-term, you should pay attention to the data above and make your own conclusions on how utilities can meet your total return goals and whether you would want that return in installments or all at the end when you sell it.

Here are the other two utilities (wolves in sheep's clothing) in my portfolio that have beat the market over a 19-year period:



Comments

  1. Great analysis Mr. ATM. Truly indicates the wealth building capacity of utility stocks. I will take a few slugs any time and lock them away for the long term. Tom

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  2. Eye opening, Mr. ATM. I had to send this post over to a fellow investor buddy of mine. He is looking into XEL. Clearly I need to get into this space.

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    Replies
    1. Yes, you have been saying that for a while ;) I'm still waiting for you to get in the space.

      BTW, I'm curious to what your friend likes about XEL? XEL has a much lower yield relative to other blue chip utility names, but does have a relatively high DGR of 6-7% for the past 3-years. Given that utilities are coming down to earth, I would pick D over XEL if it's the faster DGR I'm after as the starting yield on D is close to 5% and DGR of 10%. I believe that's a great opportunity to lock-in higher starting yield and then let the compounding do the work.

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    2. I will have to ask him and report back. I'd much rather have D. In fact, I might have to scoop up some during my next round of purchases.

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  3. Excellent analysis as always. Happy to have a few of those names in my portfolio. And the down times only make these investors grow larger over the course of time with dividend reinvestment. Looking forward to seeing how they perform over the next 19 years.

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    Replies
    1. Thanks Daze! and congrats again on your article on SeekingAlpha: https://seekingalpha.com/article/4159081-recent-buys-dominion-energy-abbvie

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  4. A masterclass on Utilities right here Mr. ATM! Thank you for some great information.

    My green side is still getting the better of me. Do you have the same analysis on BEP? (Negative eps at the moment, I know)

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    Replies
    1. Thanks Mr. Robot.

      I don't follow BEP but a quick glance tells me it is a Limited Partnership and not a corporation. It is not a regulated utility either and therefore dividends are not dividends but rather distributions. It buys and sells energy assets taking advantage of up and down cycles.

      Also, because it is a LP, you need to look at FFO and not earnings. Company is based in Bermuda (a negative for me).

      It does have a decent credit rating of BBB+ with a 38% debt/cap. FFO has been negative for past several years and finally positive growth in 2017.

      Because BEP is a LP, its dividend is actually called a distribution which has a pass-through tax implication. Shareholders or partners are responsible for paying all the taxes, the US shareholders get K-1 form instead of 1099. I hate K-1 forms.

      I can only pull up history going back to 2012 and it shows annl. ROR of 7% which seems pretty good. But the history is not long enough for me to compare it to blue chip utilities.

      The yield is around 6.3% which is very high and likely full of risks.

      I personally don't like LPs or MLPs, especially if they are based off Bermuda, Bahamas, or Cayman Islands and stay clear of them. I got my reasons based on having experienced investing with them in the past. Maybe I watch too much American Greed on CNBC, ha ;)

      To feed your green side, why not invest in utilities like NEE? It has a annual Total ROR double the size of S&P return for the past 19 years. Of course, the dividend yield is much lower but that's because it is one of the highest quality utilities out there.

      For long-term investing, quality matters the most because you want the company and its dividend to not only sustain but grow over that long period. A risky company tends to cut its dividend or may even go bankrupt during economic or industry downturns and thus not a good long-term investment, in my opinion.

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    2. That is one extensive and complete reply. Thank you so much! I had hoped for some positivity but totally understand your negative feelings about it. I'll keep doing my research in the utilities sector.

      I have already made my buy for April and surprise it's not a utility ;) I'll make a blogpost out of it in a few days, first I'm celebrating my first yoy comparison :) thanks again!

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