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The Top Utility Stocks with Strong Dividend Growth

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Dividend growth plays a vital role in driving investors’ total returns over the long term, making it important as a dividend yield. Utility stocks’ average dividend growth was around 4% in the last five years while some of them even clocked a dividend growth of above 20% in this period.

Utilities are aiming for similar dividend growth for the future as well, which reasonably beat inflation. Also, utilities’ earnings are not susceptible to business or economic cycles. Thus, it makes their dividends relatively more reliable.

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Utility stocks and their dividend growth

AES Corporation (AES) holds the top spot in terms of dividend growth. It increased dividends by 22% compounded annually in the last five years. It is currently trading at a dividend yield of 3%, in line with the industry average. The utility only started paying dividends in 2012. So, it has a shorter payment history. AES operates in 16 countries and is largely involved in competitive operations. Thus, its earnings are relatively less stable.

NextEra Energy (NEE), the biggest utility stock by market capitalization, also stands tall in terms of dividend growth. It raised its dividends by 12% compounded annually in the last five years. Also, its superior earnings growth fueled the above-average dividend growth in the last several years.

Interestingly, NextEra Energy expects above-average earnings and dividend growth for the foreseeable future. It yields 2.2%: this is one of the lowest among peers. However, NEE is one of the top gainers among utilities this year. It has surged more than 35% YTD.

EIX, AWK, and others’ dividends

Edison International (EIX) prominently operates in California. It increased dividends by 12% compounded annually in the last five years. It offers a dividend yield of 3.4% This is marginally higher than utilities at large. Also, EIX stock is up more than 25% so far this year.

Top utility stocks Duke Energy (DUK) and Southern Company (SO) reported below-average dividend growth in the past. They increased dividends by 3% in the last five years. DUK and SO yield 4.3% and 4%, respectively, at the moment.

Water utility American Water Works (AWK) reported dividend growth of 10% in the last five years. Its stable earnings in the last few years facilitated a stable dividend growth. AWK currently yields 2%. Also, it declared a quarterly dividend of $0.50 per share last week.

American Water generates a large portion of its revenues from regulated operations, making its earnings stable. Regulated operations usually enable stable and predictable earnings, which eventually facilitates stable dividends.

Utility stocks: Total returns

Let’s now look at how these dividends growths fared in terms of total returns. In the last five years, renewables giant NextEra Energy and American Water Works returned approximately 160% each, including dividends. This is more than double the S&P 500 and utilities at large.

AES Corporation, the top utility in terms of dividend growth, returned 65%, in line with the industry average. Edison International returned 30%, significantly underperforming peers. Its volatile stock influenced by wildfires in Northern California in the last few years dented investor returns.

The Utilities Select Sector SPDR ETF (XLU), the representative of top utility stocks in the country, returned 65% (including dividends) in the last five years. Also, the S&P 500 Index (SPY) returned 67% in the same period.

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