What Factors Could Affect Duke Energy’s Dividends?
Duke Energy’s dividend outlook
Duke Energy’s (DUK) relatively stable and predictable earnings bode well for stable dividend growth. It is targeting 4% to 6% earnings growth per year, which is in line with the industry average. Duke Energy’s business mix was enriched when it sold its relatively volatile merchant power generation segment in Latin America last year.
A serious challenge for Duke Energy going forward could be the sluggish electricity demand growth. The entire utility sector has grappled with this flattish electricity consumption growth in the last few years. However, Duke Energy and Southern Company (SO) have been expanding their gas distribution operations and in fact, these companies have effectively offset the negative impact as well to a certain extent.
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The chart above shows the comparative stock price movement of Duke Energy and utilities at large along with broader markets in the last five years.
Why utilities might stay strong ahead
From a broader perspective, higher interest rates are generally considered negative for utilities. However, US utility stocks have beaten broader markets in the last two years after the Fed started increasing interest rates. Also, utilities continued to trade at a handsome dividend yield premium compared to the Treasury yields in the same period. Therefore, considering the current pace of the Fed’s interest rate hikes, there might not be a substantial weakness in utility stocks going forward.
For more information about how falling natural gas prices have been adversely affecting US utilities with higher nuclear generation, read Market Realist’s series How Nuclear Generation Utilities Have Performed Recently.