Utility Stocks: With or without the dividend exclusion will offer
an excellent opportunity for high yields in your DRIP plan.
by Steve Gail
During the last few months, we have heard nothing but the talk of a "Dividend exclusion" if the Bush Tax relief plan passes both houses and becomes law. Well, let's take an even more conservative view. Let's assume that the current status quo tax structure remains in place and dividends will still be subject to their current taxation. Would there be any advantages to a DRIP plan without dividend exclusion? There sure would be! Historically the appreciation of stock has always grown with the reinvestment and growth of additional shares by dividend reinvestment. Whether these dividends that come in the form of stock or cash, it is the process of dividend reinvestment that has been the catalyst for creating wealth through investment in the equity market over the last 75 years. Great wealth has been acquired by investors who held major named Dow and Standard and Poors companies over the years and did nothing more then keep reinvesting those dividends and acquiring more stock and reinvesting the dividends on those shares. Some of the greatest distributors of dividends in the past 75 years of the stock market has been those of the Utility companies, who tend to pass large percentages of their income, in the form of dividends, back to their shareholders. In the pass, Utilities have always been the steady, conservative companies that rarely moved too much in any direction, but tended to follow a very orderly and somewhat ho-hum existence, unlike some of its fellow equity groups have done over the last 20 years. Now, if you throw out the debacle of Enron and all the notoriety that surrounded its demise, the Utility averages have been the back bone to generating income for retirees and the conservative investor for decades of time. I recently wanted to look at some Utility stocks that may not be household names but have only the highest rating on their financial sheets that offer both DRIP and Direct Investment Programs. I tried to limit my selection chooses to only those companies with the following criteria:
1. The Utility must have a financial Health Grade of A- or better
2. The Utility must have had a positive return for: (all three)
3,5 and 10 year total return
3. The Utility's current dividend yield should be at least 2.5%
Notice we came up with some very interesting selections. Notice that these companies have an A- or above rating and the dividend yields range from a minimum 2.90% - 5.00% on the high side.
Sometimes a little research will go a long way. Just to give you an idea of how well these Utilities have done, lets take a look to see how $10,000 would have grown over 20 year + period of time.
EXHIBIT B: [ Source: Morningstar ]
As you can see, Utility stocks may not make you rich, but in the long term scheme of investments they provide a very steady slow growth through reinvestment of dividends and an optional cash investment plan.
Note: all of the above issues have DRIP programs and optional direct investment programs as well.
So in essence, no matter if the tax reform package passes with dividends being excluded or not, conservative, high dividend yielding Utility stocks will still be an attractive investment for the long term risk aversioned investor, especially in a DRIP account. Until next time,