Increasing the dividend for at least 50 consecutive years is the only requirement to become a Dividend King, but some stocks make it, including several utilities.
It seems simple, but it is challenging to achieve. A company must have a product or service always in demand, especially during a recession, and cannot be easily duplicated by a competitor.
Five decades of dividend growth is such a rare feat that there are just 40 Dividend King companies in 2023
We find this exclusive group an attractive place to find companies with significant competitive advantages and solid prospects for growth.
Diving deeper into the Dividend Kings, we like the utility sector for safe and reliable income. These names provide water and electricity needed even in an economic downturn.
Investors often favor utility stocks for the predictability of their business, recession-resistant business models, and steady, growing dividends over time. While these characteristics are essential under any market conditions, they become highly sought after when massive selloffs occur.
This article will highlight three of our favorite utility stocks and Dividend Kings, including:
- American States Water Company (AWR)
- Northwest Natural Holding Company (NWN)
- SJW Group (SJW)
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3 Dividend Kings Utilities
American States Water
First up is American States Water, a water utility company and Dividend King that operates in several U.S. states, including California. The company generated revenue of ~$499 million in 2021 and ~$483 million in the last twelve months. It has a market capitalization of approximately $3.46 billion.
American States Water is composed of two businesses. The Utility business primarily focuses on the regulated water service to customers in California. The Golden State Water Company has nearly 263,000 water customers across ten counties in the state, including the metropolitan areas of Los Angeles. This segment also has a small electric utility business, Bear Valley Electric Service, with almost 25,000 customers.
The American States Utility Services segment is a non-regulated water and wastewater service business that has contracts with 11 U.S. military bases. The regulated water business is the largest contributor to American States Water, generating around two-thirds of total revenue.
Like most utility companies, American States Water has limited competition in the region that it operates. While this is a plus from a competition perspective, the company is heavily reliant on seeking rate hikes from regulators to grow the business.
Unlike many utility companies, American States Water has a solid track record of seeing rate hikes as it spends an enormous amount of capital to maintain and upgrade its systems. As a result, the company has seen its average water rate base grow with a compound annual growth rate (CAGR) of more than 9% over the last few years. This growth was the driving force behind American States Water’s earnings-per-share growth by about 8.3% annually over the last decade.
American States Water’s non-regulated water business is also essential. The company signs extremely long-dated contracts of 50 years with military bases to provide water and wastewater services. This point gives American States Water predictable results for a third of its business on a very long-time horizon.
The strength of this business model has enabled American States Water to grow its dividend for 69 consecutive years. Shares yield just 1.7% today, which is above the 5-year average yield of 1.65% for the S&P 500 Index. But the company has raised its dividend with a CAGR of about 9% since 2013, as seen in the chart from Portfolio Insight*, a very high growth rate for a utility company. The last dividend increase was in July 2022 to $0.3975 per share per quarter. The company also has a reasonable expected payout ratio of just 57% for 2021, low for a utility
Next is Northwest Natural, a company founded in the 1850s but today provides natural gas service in the Pacific Northwest to millions of people. The approximately $1.7 billion company had annual sales of $860 million in 2021 and $956 million in the past twelve months.
Northwest Natural is a diversified utility company and a Dividend King. The company’s primary business is providing natural gas to Oregon and Southwest Washington customers. The company has 2.5 million customers, more than 790,000 connections, and 14,000 miles of pipeline. Additionally, Northwest Natural has close to 21 billion cubic feet of underground storage capacity in Oregon.
The company’s waste and wastewater business provides service to 150,000 people in Oregon, Washington, Idaho, Arizona, and Texas in what happen to be some of the fastest-growing service areas in the country.
Northwest Natural is also entering into the renewable energy space, though this process is in the early stages of development. The company plans to make investments in renewable fuel sources and decarbonize various sectors.
The utility hasn’t been as successful with rate hikes as American States Water over the past decade, which, combined with a higher share count, is why the company’s earnings-per-share have grown slowly in the past decade.
The company aims to reverse this trend of declining earnings as it expects to grow both its customer and rate bases over the next few years. Northwest Natural has had success increasing its customer base in the past and, in keeping with that, expects 1.4% growth going forward in this area. In addition, leadership has guided towards a 4% to 6% annual increase in rate bases through 2025, a strong reversal of prior trends.
Northwest Natural’s natural gas business accounts for the vast majority of revenue and earnings, so gaining customers and rate base hikes would go a long way towards higher growth. Another factor working in Northwest Natural’s favor is that two-thirds of customers live in residential areas. As a result, most, if not all, of these customers would likely continue to pay their utility bills in the event of a recession.
Northwest Natural’s dividend growth streak stands at 67 years. The dividend has barely moved since 2013, as it has a CAGR of less than 1%. However, the stock does yield about 4.0% at the moment, three times the average yield of the market index. Northwest Natural has an expected payout ratio of 75% for 2021, lower than nearly any other year since 2011.
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Finally, we have SJW Group, another water utility company and Dividend King that produces and distributes water to customers in four states. The company has a market capitalization of $2.34 billion and makes $574 million of revenue in 2021 and $589 in the trailing twelve months.
SJW Group has 1.5 million customers, 398,000 service connections, 400+ wells, and more than 300 water storage facilities across its service territories in California, Texas, Connecticut, and Maine. So by region, there might not be a more diversified water utility company.
SJW Group’s primary business used to be located in just the Silicon Valley area of California and the area north of San Antonio, Texas. These regions were amongst the fastest growing in the country. SJW Group has seen solid growth in rate bases in its most important area of California.
In an effort to diversify and expand its business, SJW Group purchased Connecticut Water in late 2019, a former Dividend King.
This acquisition extended the SJW Group service area to Maine and Connecticut. In addition, this acquisition added 450,000 customers and 138,000 connections to the company. The purchase also dropped the reliance on California for revenues, as the contribution from this region declined from ~90% of the total to 54% after the acquisition.
Lastly, SJW Group has a small real estate business where it develops properties for residential and warehouse customers in California and Tennessee. The income generated from this business goes to paying for water-related upgrades elsewhere.
The addition of Connecticut Water has already been a tailwind to results as revenue grew more than 34% in 2020 from 2019. In addition, the strength of the company’s business has enabled earnings-per-share to compound at a rate of 4.9% annually over the last decade.
SJW Group’s dividend has compounded at a rate of around 7% per year since 2011, as seen in the chart from Portfolio Insight*, and the company has a dividend growth streak of 56 years. The stock yields 1.97% today, and the projected payout ratio of 76% is acceptable for a utility.
Final Thoughts on 3 Dividend King Utilities
We feel confident in ranking the Dividend Kings amongst the best of the best for growing dividends. The roughly 40 companies that constitute this group have raised dividends far longer than the vast majority of other companies in the market.
Among the different sectors of the economy, the utility sector is one of our favorites as it can provide dependable, steady dividends during all phases of the economic cycle.
American Water States, Northwest Natural, and SJW Group are three of our favorite Dividend King utility stocks. Each name has at least 55 years of dividend growth, and all provide market-beating income with very reasonable payout ratios. Investors looking for safe and secured income should consider adding these three stocks to their portfolios.
Disclosure: Members of the Sure Dividend team are long AWR, NWN, and SJW.
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Nathan Parsh written about investing, with a focus on dividend growth investing, since 2016. He currently writes for GuruFocus and has written for Seeking Alpha in the past. He is a member of Sure Dividend team since 2018.