Bear markets are a test for investors, as high levels of fear can lead to detrimental short-term thinking. The bear is still with us, but it’s not too late to start thinking long term. Utility Dominion Energy (D 0.81%) is a good option for investors concerned about dividend growth. Peer Consolidated Edison (ED 0.80%) suitable for security-oriented investors.
The reset and the return to growth
Dominion Energy cut its dividend in 2020 after selling a large part of its (pipelines) business to Berkshire Hathaway. It was the latest step in the company’s efforts to shed its unregulated business segments and become a fully regulated utility company, and not as a result of the coronavirus pandemic. This moment was just a coincidence. Now, after the reset, the utility company is focusing on investing in its assets to ensure system reliability. An effort that also helps it justify rate hikes to regulators.
The numbers are huge, with a capital investment plan of $37 billion over the next five years or so. About 85% of that spending is on clean energy, and 75% is expected to go directly into tariffs without having to be approved. In other words, there’s a fair amount of clarity for Dominion’s future right now.
This is why the management is so confident that it will be able to increase its profits by 6.5% per year until at least 2026. That might not sound like a lot, but for a utility, that’s pretty fast growth. The dividend, meanwhile, is expected to grow at an annualized rate of 6% per year, just behind earnings. Again, that might not sound like a lot, but it’s a solid number for a utility. Notably, all of this spending is expected to continue regardless of what happens on Wall Street. Dividend growth investors looking to add a solid core investment to their portfolio should take a close look at Dominion.
2. As boring as it is boring
Utility Consolidated Edison is at the other end of the spectrum here, with nearly five decades of annual dividend increases behind it and a 10-year annualized dividend growth rate of just under 3%. It’s a slow and steady dividend turtle, but it may work for you if reliable dividends are what you’re looking for.
A notable part of the puzzle here is that ConEd, as it is colloquially known, operates in and around New York. (Dominion, by comparison, operates in 13 states.) The Big Apple is a major business center that has historically seen steady demand and driven ConEd’s slow and steady dividend growth. But the most notable story right now is that the electric and natural gas utility just passes energy costs on to customers. What sustains its revenue are the costs associated with the reliable transmission of electricity. The ups and downs of the economy can impact electricity demand, but that doesn’t change how much a customer pays each month to be connected to the grid. The cost of this reliably increases as ConEd invests in its business.
Right now, ConEd has planned about $15 billion in spending over the next three years, including 2022. That’s unlikely to lead to the kind of earnings and dividend growth that Dominion will put in place, but it should still provide this turtle with enough growth to keep its dividend streak alive. Which, for a conservative income investor focused on creating a reliable stream of income, is likely to be most important. ConEd is, ultimately, a boring type of investment. It’s the kind that will protect you in a bear market – note that the stock is up 11% so far in 2022.
This price appreciation has pushed the stock to a higher valuation, so you will pay a high price for consistent dividends here. But don’t let the relative outperformance sour you on ConEd. If dividends and safety (there’s no way of knowing when a bear market bottom has been reached) are important to you, you might want to consider adding it to your portfolio, even at the relatively high prices. of today.
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Dominion and Consolidated Edison are attractive income options for different types of dividend investors. That said, Dominion and ConEd are yielding around 3.4% today. That might not sound like a lot, but if you compare it to the 1.5% dividend yield you would get from a S&P 500 Index funds, well, you can see why these two utilities might be of interest today. And with no way of knowing when that bear will end, both can also add significant diversification to your portfolio.
Reuben Gregg Brewer holds positions at Dominion Energy, Inc. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Dominion Energy, Inc and recommends the following options: $200 long calls on Berkshire Hathaway (B shares) January 2023, $200 short put options on Berkshire Hathaway (B shares) January 2023 and short calls of $265 from January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.