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Are the Dividends of Utilities Stocks Safe?

Inflation poses a risk to the sector.

The following is an excerpt from the video series Dividend-Stock Deep Dive, hosted by Morningstar DividendInvestor editor David Harrell. Watch the full interview.

Harrell: I'm going to circle back to dividends because almost all utilities under your coverage pay dividends, and many of them have fairly attractive yields, and if you look at the portfolios of many if not most income- or dividend-focused investors, you're going to see a fairly large, relatively large, exposure to utilities. Just looking at the sector as a whole in this higher inflation environment, do you believe that utility dividends are generally secure in this environment?

Miller: Generally, the utilities dividends are very secure. I've not said that for 15 years that I've been covering the sector. I have very, very strong confidence in the dividend payments. Now the interesting part is, one, dividend growth, and two, what's your real in terms of interest rate and inflation-adjusted dividend yield? What we've seen here over the last 10 years or so, a huge dividend premium for utilities. And when we think about that, we plotted the dividend yield for utilities versus the 10-year U.S. Treasury yield. At some points here within the last couple of years, you've reached a 200-basis-point premium such that ...

Harrell: Because the Treasury yield has been so low ...

Miller: Treasury yields have come down, and utilities' dividend yields have really stayed pretty strong. They've continued to grow. You continue to have utilities' dividend yields above 3%, which at times has been, again, 200 basis points above (yields). It's a huge premium. We haven't seen premiums like that in more than 30 or even 40 years of history. Utilities in terms of their dividend yields start in a really good spot. They start with a very good premium to interest rates. Again, one of the things where if interest rates were to go up, historically speaking, utilities are really still the only place to go for a very attractive dividend yield. Now inflation would be the driver and higher interest costs would be the driver that could slow dividend growth. In terms of yields, still a very attractive yield, over 3% right now.