There is way more to consider about a dividend stock than just its dividend yield. That is on clear display when you compare Black Hills Corporation(NYSE: BKH) and Dominion Energy(NYSE: D). In the end, the yield is going to be less important here than the future prospects for the dividend and company history when you make a final call. Here's what you need to know and why the lower-yielding utility might be the better choice for you.
What do Black Hills and Dominion do?
Both Black Hills and Dominion are primarily regulated utilities. That means they are given monopolies in the regions they serve, but they have to get their rates and investment plans approved by the government. This usually leads to slow and steady business expansion over time. Neither of these companies should be considered growth investments.
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Black Hills is the smaller of the two, with a market cap of around $4 billion. Dominion is one of the larger utilities in the United States, with a market cap that's an order of magnitude larger (roughly $47 billion). As you might expect, Black Hills' customer base is much smaller, too, at around 1.3 million customers in parts of eight states. Dominion serves 4.5 million customers in parts of 13 states.
There's another subtle difference that's vitally important. Black Hills operates across both electricity and natural gas. Dominion has historically done both, but has decided to pare its business down so that electricity is the main driver of its operations. The business makeup doesn't matter as much as the fact that Dominion has basically frozen its dividend as it shifts its business toward electricity. Right now it is focusing on strengthening its balance sheet and lowering its dividend payout ratio.
D Dividend Per Share (Quarterly) data by YCharts
Black Hills is a Dividend King
The importance of this becomes more clear when you find out that Black Hills has increased its dividend for more than five decades, making it a Dividend King. Dominion, meanwhile, cut its dividend a few years back when it sold off its midstream pipeline business, an earlier step toward becoming a pure-play electric utility. If you care about reliably collecting a dividend check, Black Hills wins hands down.
However, Black Hills' dividend yield is 4.3%, while Dominion Energy's yield is 4.7%. The higher yield might tempt yield-hungry investors. And while dividend increases are on pause at Dominion right now, it will likely start to increase the dividend again along with earnings growth in a few years' time once the payout ratio is closer to industry averages, but there's no specific target being provided. The company estimates that earnings will expand at 5% to 7% per year through 2029. Of course, management also said that dividend growth was a prime goal after the dividend cut, and that didn't exactly pan out as planned since dividend growth is now paused.
Black Hills, meanwhile, has had an average dividend increase over the past decade of around 5%, while it is projecting earnings growth of 4% to 6%. That's not far from what you might expect from Dominion when, perhaps if, the dividend starts growing again. If you choose Dominion, you'll have to give up a few years of Black Hills' dividend growth, but your offset will be the higher starting yield. That will probably make the issue something of a wash at the end of the day on the income front. But the real question is about the business behind the yield, and there it again looks like Black Hills is more focused on its shareholders' well-being.
What's the better high-yield option?
Given the ongoing changes at Dominion, which included a dividend cut, the failure to live up to management's dividend projection following the cut, and now a dividend pause that won't end until the payout ratio is back in line with peers, Dominion is something of a turnaround stock. The risk isn't that high, but management has to prove that it can be trusted. It's probably most appropriate for more aggressive investors, at least until the dividend actually starts growing again.
Black Hills, meanwhile, is the type of boring, high-yield utility stock that even the most conservative investor could love. While it's a small company, it has clearly proven it can pay investors well through good times and bad. Missing out on a little yield compared to Dominion will probably be a net win when you take the underlying businesses into consideration.
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Reuben Gregg Brewer has positions in Black Hills and Dominion Energy. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
