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Stock Strategist Industry Reports

Dividend Leaders and Laggards Among Utilities

Equity valuations remain rich but still offer opportunities for income.

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Just over halfway through 2019, utilities continue to impress, with good growth prospects, secure dividends, and sound balance sheets. Investors have taken note, with the U.S. utilities we cover trading at a median 12% premium to our fair value estimates as of mid-August. That means investors’ long-term capital gains are at risk even if utilities make good on their 5%-7% earnings and dividend growth potential. However, utilities remain an attractive source of yield for income investors. Even with elevated equity valuations, the spread between utilities’ dividend yields and the 10-year U.S. Treasury yield remains above historical levels.

We think NextEra Energy (NEE), Sempra Energy (SRE), and American Water Works (AWK) have the highest dividend growth potential, driven by strong capital growth opportunities and relatively low payout ratios. We forecast Southern (SO) and Dominion Energy (D) will be dividend growth laggards, constrained by high payout ratios and capital investment needs. Finally, PPL’s (PPL) struggles in the United Kingdom will probably result in no dividend growth and could lead to a dividend cut after the RIIO-ED2 regulatory outcome.

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Andrew Bischof does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.