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Can We Expect Higher Dividend Growth from Regulated Utilities?

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Mar. 23 2016, Updated 1:05 a.m. ET

Forward dividend yield

In this part of the series, we’ll see a broader picture of utilities’ forward yields and their expected dividend growth. Utilities giants such as Southern Company (SO) and Duke Energy (DUK) are trading at higher forward dividend yields compared to peers PG&E (PCG) and Dominion Resources (D).

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Peer comparison

Utilities are largely trading at a forward yield of about 4%. Their dividend growth is expected to remain in the range of 4%–6%, as their earnings are expected to grow this year. Compared to Duke Energy, Dominion’s forward yield is nearly 4%. PG&E has a forward yield of 3.2%.

NextEra Energy (NEE) is trading at a lower forward yield of 3%, while its dividend growth for the next two years is 13%. Its lower yield can probably be explained by its strong contribution from regulated operations.

Dividend growth

Dominion Resources’ higher-than-expected dividend growth of ~7% compared to Southern Company and Duke Energy most likely explains its relatively lower forward yield. Comparatively higher earnings contribution from regulated operations explains the lower yield of Dominion Resources.

Regulated utilities giants are expected to complete three merger deals this year. Southern Company is acquiring AGL Resources (GAS), and Duke is acquiring Piedmont Natural Gas (PNY). Questar (STR) will be merged with Dominion Resources. The combined entities may experience incremental earnings in a couple of years, which could lead to increased dividends.

We’ve looked at expected dividend growth for these utilities (VPU), but are these utilities overvalued? Let’s compare these utilities from a valuation aspect in the next part.

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