The utility sector has had a very good run, with the Utilities Select Sector SPDR ETF(NYSEMKT: XLU) up roughly 35% over the past year. Utilities have actually done just a little better than the S&P 500 index over that span. That's good news for utility investors who bought a year ago, but if you are an income investor looking at utilities now, there's a small problem. The sector is yielding just 2.7% at this point. Don't give up; there are still some attractive dividend-paying utilities out there.
How about a Dividend King with a yield of 4.3%? That would be Black Hills(NYSE: BKH). Or what about a company that's paid a dividend for 140 consecutive years and is offering a 6% yield? That would be diversified UGI Corp.(NYSE: UGI). And both are accessible investment options, with stocks that are trading well below $200 per share.
Black Hills is small but mighty
Most investors have heard of industry giants like NextEra Energy and Southern Company. But Black Hills, with a relatively tiny $4.3 billion market cap, has long flown under Wall Street's radar. That's a shame because itty bitty Black Hills beats out its largest peers where it counts for an income stock -- dividend consistency. Unlike NextEra and Southern, Black Hills is a highly elite Dividend King.
Image source: Getty Images.
In addition to having increased its dividend for 50-plus years (and counting), Black Hills also has an above-average 4.3% dividend yield. So even after a utility stock rally, Black Hills will probably still be pretty interesting to income investors. That said, there are good things and bad things to consider here.
On the negative side, Black Hills has a material debt load. That was a headwind while interest rates were rising, leading management to pull back on its capital investment plans (which means slower growth). But with interest rates starting to fall again, this headwind doesn't seem quite as bad anymore. On the positive side, this natural gas and electric utility, serving roughly 1.3 million customers, has seen customers in its operating regions grow nearly 3 times faster than U.S. population growth overall. As capital investment ramps up over the next couple of years, management is targeting earnings growth of between 4% and 6% a year. The dividend is likely to follow earnings higher.
All in, it looks like Black Hills is something of a hidden gem. If you don't mind owning a somewhat unknown utility, you'll want to get to know Black Hills and its attractive yield.
UGI's dividend is flatlining, for now
UGI is another lesser-known utility, but that's probably because, unlike the fairly traditional Black Hills, it is more than just a utility. Indeed, UGI owns electric and natural gas utilities, propane operations, an internationally focused liquid petroleum gas business, and midstream energy assets. It's kind of a complex hodgepodge of a business with fingers in both the utility and energy sectors. However, it has paid a dividend every year for 140 years, so this is no fly-by-night operation.
That said, UGI is in something of a transition period. It is looking to strengthen its balance sheet and streamline its operations, notably including an effort to cut operating costs. There's a little uncertainty here because of the business reset that's taking place and investors have shunned the stock. That's part of the reason for the big 6% dividend yield.
There's one more thing, though. Management is very clear that it is planning to hold the dividend steady through at least 2026 as it prioritizes debt reduction. But, if things go according to plan, the dividend should start to grow by around 4% a year in 2027 and beyond. If you don't mind collecting a well-above-average yield from a business with a natural gas and electric utility foundation, UGI is worth a deep dive today as it works through a business reset.
A little extra risk for a lot of extra yield
Both Black Hills and UGI come with more risk than larger and better-known utility options like NextEra and Southern. But you are getting paid very well to take on the added risk in the form of elevated dividend yields. If these were companies with terrible dividend histories the story would be different, but Black Hills is a Dividend King and UGI has a 140-year history of paying a dividend. When you dig in, the extra risk doesn't seem that extreme after all.
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Reuben Gregg Brewer has positions in Black Hills and Southern Company. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
