Two top utility companies for dividend growth investing

Introduction – utilities

I like to invest in utility companies and one of the key reasons for this is the security and the stability that they tend to offer. One really nice thing is that they tend not to be exuberantly priced and have large price run-ups beyond what I believe the utility’s reasonable intrinsic value is. Because of this, they can be good dividend growth stocks. Another nice thing is they tend not to decline too far below the intrinsic value. Now obviously, this means I cannot invest with very large margins of safety and trade in and out of the stock, but I do appreciate that they are very stable, which is also quite an important benefit to consider. In both cases, there is dividend growth over time, making these suitable for dividend growth investing.

NGG as a good dividend growth stocks

Nationa Grid PLC (NGG) is an investment in utilities that is like an investment in an MLP and is often going to provide stability in the energy sector because they run the transmission and logistics for energy.  NGG operates in much the same way in the utility sector operation in the electric grid in the UK. This provides stability, often attractive for dividend growth investors, seeking stability in capital and protection of capital in addition to dividend growth.

This positioning in the marketplace ensures it tends to be an exceptionally stable investment. Some might call it a bond-like investment, but it is still an equity with all the equity risks. Having said that, it has a low beta, and it also tends to have reasonably predictable earnings over the years, which do not increase by a significant amount. Wrapping this up, it is a long and slow burning example of good dividend growth stocks.

Figure 1. Expected future growth and dividend growth in NGG, based on Fast Graphs data and Factsec analysts

As we can see from the Fast graph (Figure 1), there is a small amount of upside that might become available over the coming few years, but this is going to be limited. We expect the company earnings to go only approximately 5%. That means it with the company roughly at what I think is a reasonable level and not far below the intrinsic value (represented by the ‘recent normal multiple’ shown by the central blue line), the price appreciation to match the earnings growth is going to be limited. It is not the fastest of the dividend growth stocks! However, coupled with the reliable dividend payments (which are semiannual) this leaves me with an expectation of approximately 10% return per annum for several years, consisting of half dividend and half appreciation of the company value based on growing earnings.

The other advantage is that this return is not to be sneezed at, as markets may continue to be extremely volatile, I suspect. This is unlikely to decrease in value much and should keep paying a nice dividend. These are important considerations for dividend growth investing.

ENLAY for dividend growth investors

One of my favorite utility companies heralds from the southern part of Europe and is domiciled in Italy. Enel (ENLAY as the US-based ticker) is a leading provider of energy in both the established market officially and within faster-growing South American regions. As a consequence, they can offer quite a stable and reliable dividend, but also with the opportunity for this to grow over time. Now, a quick look at the history of the dividend payment and the company’s performance suggests that there is a spotty track record. However, in recent years, the executive team has committed to greater stability and a more shareholder-friendly approach. We should see the result flowing through to stability within the dividend over time and slower but more steady growth in company earnings.

In contrast with national grids NGG, this option offers substantially more upside as an example of a more rapidly growing dividend growth stocks. As we can see in figure 2, the expected annual return for this pick is approximately 3 times higher than NGG.

Figure 2. ENLAY’s expected future growth and dividend growth based on Fast Graphs data and Factsec analysts

Which of these is a better pick for your portfolio?

There’s no individual or easy answer to this, and it’s a question that you have to examine by looking at your current holdings and your overall objectives. Given the high level of market volatility at the moment, NGG represents a more stable choice but has a lower income and returns expectation. We expect ENLAY to take you further with capital appreciation and also provide a higher level of income, which may help smooth out some bumps in the road and offset any future volatility. These are, of course, only two dividend growth stocks that might be considered. REITs provide other good options.

 

Introduction – utilities I like to invest in utility companies and one of the key reasons for this is the security and the stability that they tend to offer. One really nice thing is that they tend not to be exuberantly priced and have large price run-ups beyond what I believe the utility’s reasonable intrinsic…

Introduction – utilities I like to invest in utility companies and one of the key reasons for this is the security and the stability that they tend to offer. One really nice thing is that they tend not to be exuberantly priced and have large price run-ups beyond what I believe the utility’s reasonable intrinsic…

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