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Are the Top-Yielding Utilities Really Worth the Risk?

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Utilities with the highest yields

Utilities are the highest-yielding equities, with their yields surpassing that of the SPDR S&P 500 ETF (SPY) by more than 100 basis points. Utility stocks have stayed strong for the past couple of years mainly due to their attractive yields.

In this series, we’ll compare three dividend yield leaders: Southern Company (SO), Entergy (ETR), and FirstEnergy (FE).

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These three companies vary significantly in terms of size, geography, and business mix. SO operates as an almost entirely regulated utility, while the other two generate large portions of their consolidated revenues from competitive operations.

However, all three stocks are currently trading at yields higher than 4.5%—the highest in the S&P 500 Utilities Index (XLU).

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Dividend yields

Georgia-based Southern Company (SO), one of the largest utilities in the US, is now trading at a dividend yield of 4.6%, while FirstEnergy (FE) and Entergy (ETR) are offering yields of 4.7%.

Peer NextEra Energy (NEE), the largest utility by market capitalization, now offers a yield of 2.7%, while Duke Energy (DUK) is trading at a dividend yield of 4.1%.

The yields offered by the three utilities we’ll be comparing (SO, FE, and ETR) are particularly attractive because utilities—the highest yielding sector—yield ~3.5% on average. These utilities yield more than 200–220 basis points more than the ten-year Treasury yield.

With few exceptions, the dividend yields of these three utility stocks have not fallen below 4% in the past five years. But are these yields really worth the risk? Has the dividend growth of these utilities been truly attractive, or have their plunging stocks just made their yields look good? Will these utilities continue to offer such premium yields?

Continue reading this series (below) for a closer analysis.

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