Dividend longevity is a highly desirable trait for income investors, and for good reason. Companies that have proven to be able to stand the test of time, including competitive headwinds, recessions, and other threats to earnings typically afford investors the ability to accrue significant wealth over time. Most companies cannot meet these strict requirements for dividend longevity, so for those that do, it is worth taking notice.
Perhaps the best-known group of exemplary dividend stocks is the Dividend Aristocrats, a group of just 66 companies that have raised their dividends for at least 25 consecutive years. The group contains stocks from just about all sectors, but utilities – a long-time favorite of income investors – boasts 3 stocks on the Dividend Aristocrats list. In this article, we’ll take a look at those three stocks and what makes them attractive for investors today.
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NextEra Energy, Inc. (NEE)
Our first stock is NextEra Energy, a utility that generates, transmits, and distributes power to retail and wholesale customers in North America. NextEra generates power through a variety of methods, including wind and solar, as well as more traditional methods such as natural gas and coal. The company serves about 11 million people, so its scale among the highly fragmented utility group is significant.
NextEra was founded in 1925, generates about $22 billion in annual revenue, and trades with a market capitalization of $148 billion.
NextEra’s growth has been quite impressive for a utility, averaging about 9% annually in the past decade. That is partially because NextEra sees a small amount of organic growth each year through rate increases, increased usage, and higher customer counts. But the company acquires growth as well from time to time, adding to its top and bottom-line growth potential. We estimate NextEra can grow earnings at 7% annually for the foreseeable future.
NextEra’s competitive advantage is like many other utilities in that it has what amounts to a monopoly in its service areas. Combined with NextEra’s massive scale, it is a very efficient operator.
The company’s dividend increase streak is currently at 26 years, and its payout ratio is just 60% of earnings. That means that not only is the payout very safe, considering the company’s relatively predictable earnings, but it has ample room to grow over time as well. NextEra’s yield is just 2% today, which is quite low among utilities, but still about 1.6X that of the S&P 500 Index. So while NextEra’s current income isn’t as high as some other utilities, its scale and dividend safety put it in the group of top-tier dividend growth stocks.
Consolidated Edison, Inc. (ED)
Our next stock is Consolidated Edison or ConEd. This utility operates regulated electric, gas, and steam delivery businesses in and around New York City. The company offers electric services to 3.5 million customers, gas to 1.1 million, and steam to a very small number of customers. ConEd also has a small renewable energy generation and infrastructure business.
ConEd was founded in 1823, generates over $13 billion in annual revenue, and trades with a market capitalization of $31 billion.
ConEd’s growth has been pretty muted in the past decade, coming in at just over 2% annually. That includes three years where earnings came in lower than the prior year, but over time, earnings are moving gradually higher.
We see 3.5% growth ahead, consisting mostly of rate hikes, as well as a small measure of customer growth and increased usage. The areas where ConEd operates are already extremely heavily populated, so customer growth is a challenge. However, ever-increasing amounts of demand, as well as regular rate hikes, should help drive the top and bottom lines higher.
ConEd’s competitive advantage is surely the area it serves. Like other utilities, ConEd has a monopoly in its service area, but it operates in the New York City metropolitan area, home to millions of people and countless businesses.
ConEd’s current yield is quite strong at 3.7%, which is about triple that of the S&P 500. The company also boasts a 48-year streak of dividend increases with its recent 2022 raise. That puts ConEd in rarified company in terms of dividend longevity, and we see many more years of increases ahead. The payout ratio is just over 70% of earnings, so even if ConEd does see a small decline in earnings year-over-year, it has plenty of excess earnings with which to pay, and indeed raise, the dividend.
Atmos Energy Corporation (ATO)
Our final stock is Atmos Energy, a natural gas utility based in Texas. Atmos, unlike the other two on this list, is very heavily leveraged to one type of fuel, with that being natural gas. Atmos operates in eight states in the US, distributing gas to three million customers. It also owns a pipeline and storage business.
Atmos was founded in 1906, generates $3.8 billion in annual revenue, and trades with a market capitalization of $14.4 billion.
Atmos has done an exemplary job of growing earnings in the past decade, averaging 10% annually over that time frame. It has been able to do that via a combination of organic growth in customer counts and rate increases, but also some well-targeted acquisitions. We expect to see 6% annual earnings growth on average in the coming years, accruing from the same factors.
The company’s competitive advantage is similar to other utilities in its monopoly, but we like Atmos’ geographic diversification as well. Rather than being in a concentrated area, Atmos operates in a wide swath of the southern US.
Atmos’ current yield is 2.6%, about double that of the S&P 500, so for current income, it’s fairly attractive. In addition, it has raised its dividend for nearly 40 consecutive years, with the probability of decades of further increases to come. Atmos’ payout ratio is very low for a utility at just 50% of earnings, so dividend safety is exceptional, along with plenty of room to grow.
Final Thoughts on 3 Dividend Aristocrat Utilities
Utilities are often thought of when it comes to income stocks, but not all are as attractive as the best of the bunch. The three highlighted here all offer decades of dividend increases, reasonable growth, high levels of dividend safety, and market-beating yields. Given these factors, we like NextEra, ConEd, and Atmos as shining examples of 3 utilities that are Dividend Aristocrats.
Disclosure: Members of the Sure Dividend Team are long some of the stocks mentioned.
You can also read 3 Best Banks Stocks in 2022.
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Bob Ciura is President of Content at Sure Dividend. Bob has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. Bob received a bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.