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Why Water Utilities Yield Nearly Half What Electric Utilities Do

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Nov. 17 2016, Updated 8:04 a.m. ET

Dividend yields

Investors have preferred water utilities for the past few quarters due to their relatively higher dividend yields and stable stock price movements. Water is also a safe and smoothly growing industry. But currently, water utilities are yielding nearly 2%—roughly half the current yield of electric utilities. The slow earnings growth of water utilities might have impacted the dividend payments.

Water utilities resemble the dividend characteristics of electric utilities in many respects. American Water Works (AWK) has paid dividends to shareholders every year since 1931 with increases for 62 consecutive years.

The dividend yields of major water utilities largely pointed downward until 2Q16, but stock corrections might have pushed the yields back up.

American Water Works (AWK) is currently trading at a yield of 2%, while the other three major US water companies in our analysis yield about 2.5%. But AWK has a much higher expected dividend growth, and analysts are expecting its dividends to rise 8% annually for the next two years.

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Yields of water utilities versus electric utilities

US electric utilities (VPU) are currently trading at a yield of ~4%—nearly double what water utilities (PIO) and Treasuries (TLT) are yielding. Although both water and electric utilities are slow but stable-growing industries, electric utilities are paying higher dividends, supported by healthy regulatory policies.

Notably, electric utility biggies Duke Energy (DUK) and Southern Company (SO) are currently yielding more than 4.5%.

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