Infrastructure

4 High Yielding Utility Stocks To Own Even When Rates Go Up

Lee Jackson

Published: November 24, 2015 9:01 am

Last Updated: January 13, 2020 4:49 pm

While the determination on interest rates going higher isn’t a totally done deal, the signs pointing to a December lift-off are about as strong as they can be. Toss in the fact that Federal Reserve board governors are chiming in that the landscape looks better and the odds improve even more. Like we have told our 24/7 Wall St. audience on numerous occasions, the increase of 0.25% or maybe even 1.00% is negligible and should have little overall impact.

One area investors have looked for income has been the utility sector, which roared during the multiple quantitative easing periods and has since slowed down on concerns of rate increases. We scanned the UBS research universe for the top companies in the sector that should continue to do just fine in a very slowly rising interest rate scenario.

Included in the data is the current dividend yield and how the stock has traded around expectations and history. Many of the Wall Street firms that we cover are becoming more positive on utilities again after this year’s underperformance and this top company also resides in the UBS quality growth at a reasonable price portfolio.

Dominion Resources

Dominion Resources, Inc. (NYSE: D) is one of the nation’s largest producers and transporters of energy, with a portfolio of approximately 24,600 megawatts of generation and 6,455 miles of electric transmission lines.

Dominion operates one of the nation’s largest natural gas storage systems with 928 billion cubic feet of storage capacity and serves utility and retail energy customers in 13 states.

Dominion investors are paid a solid 3.83% dividend. The UBS price target for the stock is $77. The Thomson/First Call consensus price target is at $78.59. The stock closed Monday at $67.58.

DTE Energy

With the potential for another cold winter on tap, this company may look to extending 2015 gains into next year. DTE Energy, Inc. (NYSE: DTE) is a Detroit-based diversified energy company involved in the development and management of energy-related businesses and services nationwide.

DTE has operating units which include an electric utility serving 2.1 million customers in Southeastern Michigan and a natural gas utility serving 1.2 million customers in Michigan.

DTE’s Energy portfolio includes non-utility energy businesses focused on power and industrial projects, natural gas pipelines, gathering and storage, and energy marketing and trading.

ALSO READ: The Growing Case for $1 Gasoline

The company recently raised the dividend by almost 6% this past summer, and the surging growth and revitalization in Detroit after years of decline could also be helping to increase demand.

DTE shareholders are paid a very solid 3.65% dividend. The UBS price target for the stock is posted at $93. The consensus number is at $87.45. The stock closed Monday at $80.53.

Hannon Armstrong Sustainable Infrastructure

This company is another solid value at current levels. Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE: HASI) provides debt and equity financing to the energy efficiency and renewable energy markets.

The Company is structured as a REIT and focuses on providing preferred or senior level capital to established sponsors and high credit quality obligors for assets that generate long-term, recurring and predictable cash flows.

The UBS team view the company as a specialty finance play on the growth of energy efficiency and renewables with a very strong management team, a differentiated investment strategy, an impressive and increasing deal pipeline, and a track record of earnings and dividend growth. The company also added to their available capital by doing a 5 million share offering recently that was priced at $18.

Hannon investors are paid a large 6.22% distribution. The UBS price target is posted at $22, and the consensus is set at $22.93. The shares closed Monday at $16.71.

PPL

This is another utility the UBS team prefers which beat third quarter earnings expectations but came in a little light on the revenue side. PPL Corporation (NYSE: PPL) serves 321,000 natural gas and 397,000 electric customers in Louisville and 16 surrounding counties; and 543,000 customers in 77 Kentucky counties and 5 counties in Virginia.

The company also provides electric delivery services to approximately 1.4 million customers in Pennsylvania; and operates electricity distribution network for the Midlands, South West, and Wales in the United Kingdom.

ALSO READ: Why Credit Suisse Stripped GE Off Its Focus Lists So Fast

In addition, it offers a range of customer-care and back-office services to competitive retail energy suppliers, including customer enrollments; contract management; electronic data exchange; simple and complex billing; and call center operations comprising telemarketing, payment processing, and collections of overdue accounts.

The company is one of the leading utility companies in the U.S. that plans to continue to increase regulated operations and lower earnings volatility attached to competitive operations. PPL raised cash and lowered debt late last year be selling some hydroelectric assets to NorthWestern energy.

PPL Investors receive a solid dividend which comes in at a generous 4.45%.The UBS price target for the stock is raised to $36 and the consensus price target for the stock is higher at $36. PPL closed Monday at $33.97.

*****

The huge capital gains for the sector from the QE days may be in the rear view mirror, that doesn’t change the upside potential for these top companies. Even when rate increases start to hit the tape, they will be small and very slow, and should have a negligible effect. These top stocks make excellent additions to growth and income total return portfolios.