The yield on the S&P 500 index is a paltry 1.3% these days, but the average yield in the utility sector -- using Utilities Select Sector SPDR Fund as a proxy -- is around 3%. That's not bad -- but an income-focused investor could do even better with utility stocks Dominion Energy(NYSE: D) and Black Hills(NYSE: BKH), which both appear to be trading at a discount to their sector.
Dominion Energy's dividend will grow at a later date
Dominion Energy's business has been in something of a state of flux for years. The company's last really big move was to sell its pipeline assets to Berkshire Hathaway, a decision that led to a dividend cut because of the size of the business sold. After that, Dominion started to increase the payouts again, only to hit the pause button in 2023 when it decided it needed to expand its overhaul, which at that point entailed selling a trio of natural gas utilities to Enbridge.
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There was no dividend cut after that divestiture, but hikes have been put on hold. Management's core focus at the moment is on strengthening the balance sheet. Wall Street is clearly displeased with the ongoing business changes and the current state of the company's dividend policy, which is why a falling share price has lifted the stock's yield to 5.4%, well above average for a utility. Management will have to prove that it is capable of achieving the stability it says it's seeking if it is going to get investors excited about the stock again.
The thing is, Dominion has now slimmed down to the point where there's little else it can cut. It is, basically, just a boring old electric utility today. Proceeds from the asset sales will go toward debt reduction, which will help get the company closer to growing its dividend again, though not all the way. The next big steps involve simply executing well with the remaining business so that the company's payout ratio eventually gets back in line with its peers.
There are some positives here, including the fact that Dominion has operations in one of the hottest regions for data centers (which require truly huge amounts of electricity) and is developing a large offshore wind farm. Still, Dominion is a turnaround story that is probably most appropriate for more aggressive investors. But now that the business review is complete, its risk/reward balance seems skewed to the reward side, thanks to the still-high dividend yield.
Black Hills is a well-positioned Dividend King
Compared to Dominion, Black Hills is really just a boring natural gas and electric utility. It serves roughly 1.3 million customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. There is nothing exciting about its business. The problem today is that Black Hills tends to carry a bit more leverage than its peers, so higher interest rates are likely to be a near-term headwind to its earnings.
There's no way around that, but the company remains financially strong and sports an investment-grade credit rating. And regulators are likely to take the impact of interest rates into account when they consider rate cases (the process by which utilities ask regulators for permission to increase what they charge) and the utility's investment plans. So, eventually, higher interest rates won't be as big an issue for the company. Meanwhile, investors buying at the current stock price can collect a hefty 4.9% dividend yield, which is well above average for a utility.
And there's plenty of good news here to get excited about. For starters, Black Hills, as a Dividend King, has an incredible record of payout hikes. Follow that up with the fact that the population in the regions Black Hill serves is expanding at nearly three times the rate of the United States overall. Management is confident that it can expand earnings by around 4% to 6% a year for the foreseeable future. Dividend growth should track along with earnings. While you won't brag about owning Black Hills, it could be a reliable cornerstone investment for most dividend-focused investors.
Two high-yield utilities to look at today
Dominion Energy and Black Hills aren't likely to interest the same kinds of investors. Dominion is a turnaround play, which makes it a higher-risk holding, but one that looks like it should work out well over time now that the heavy lifting is done. You'll be paid well to wait for better days. Black Hills, by contrast, is just a boring utility. But it is a boring utility with a great dividend-boosting track record and a huge yield.
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Reuben Gregg Brewer has positions in Black Hills, Dominion Energy, and Enbridge. The Motley Fool has positions in and recommends Berkshire Hathaway and Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
