Forward dividend yields versus dividend growth
Attractive yield is one of the most important features that conservative investors look for in utility stocks. In this part, we’ll compare forward dividend yields of utilities against their expected dividend growth for the next two years. Among our selected group of utilities, WEC Energy Group (WEC) has the highest expected dividend growth for the next two years. It’s trading at a forward yield of 3.4%, while its expected dividend growth rate is more than 8.5%. WEC’s higher expected dividend growth likely justifies its comparatively lower yield.
Now let’s compare yields and dividend growth for WEC’s peer utilities.
In this series, we’ve selected utilities (XLU) in the same market capitalization range regardless of their mix of regulated and unregulated operations. Consolidated Edison (ED) trades at a forward yield of 3.5%. Analysts expect its dividends to grow by more than 2% in the next two years. Consolidated Edison is a pure play regulated utility of New York and has a very minute exposure to unregulated operations.
Entergy (ETR) and Public Service Enterprise (PEG) trade at a forward yield of 4.5% and 3.5%, respectively. Both have a large exposure to unregulated operations. According to analysts’ estimates, Entergy has an expected dividend growth of 2.2%, while PEG has a projected dividend growth of 5%. Entergy and PEG have large exposure to unregulated operations and have relatively less stable earnings. This likely explains ETR’s higher yield compared to ED, despite having the same expected dividend growth.
WEC Energy is a regulated utility with a presence in diversified business operations such as integrated electricity businesses and transmission and gas distributions. WEC’s expected dividend growth is well above the industry average. WEC’s management anticipates its dividend payout ratio to range from 65%–70% in the next couple of years.
Now let’s see what WEC Energy’s current valuation indicates.