Income stocks
Traditionally, income stocks are most often utilities, especially electrical utilities. They are usually conservative investments with steady streams of income and are typically financially stable. Although there is always risk involved with common stock investing, income stocks should have some of the lowest risk. Sometimes they are colorfully referred to as the "widow and orphan stocks", meaning investments for people who cannot afford to lose money. Obviously, dividends are a priority when an investor's objective is income. Dividend growth and dividend stability are likewise important. Looking at the average annual growth of dividends over at least a five year period can give the investor some idea of how much growth to expect in the future. In order for a company to pay out dividends, the growth of revenues and income are important.
The primary sources of income can be a concern in some areas. The Detroit area might have trouble if the automotive industry is in a slump. The Silicon Valley area of California might have trouble when the computer industry is slow. The source of income is a part of risk more specifically, the risk of slower growth.
MATCHING THE GENERAL OBJECTIVE
With income as a general objective, we will narrow the focus to looking at electric utility companies that have a current yield comparable to five year U.S. Treasury notes. These companies should have somewhat consistent growth in dividend payments, revenues and earnings. Once income becomes the objective, select some candidates and choose which you believe to be the best opportunities. We will look at three examples, beginning with Consolidated Edison.
CONSOliDATED EDISON
Consolidated Edison, owns all of the outstanding common stock of Consolidated Edison Company of New York and Orange and Rockland Utilities. Consolidated Edison of New York provides electric service in all of New York City and most of Westchester County, an approximately 660 square mile service area with a population of more than 8 million. It also provides gas service in Manhattan, the Bronx and parts of Queens and Westchester and steam service in parts of Manhattan. The company's main business segments are the regulated electric gas and steam businesses of its utility subsidiaries and the unregulated businesses of its other subsidiaries.
DIVIDEND IS IMPORTANT
For an income objective, the most important information here is the current dividend yield of 5 percent. If the shares are purchased at the $44.12 a share, the investor locks in a 5.5 percent yield no matter what happens to the price. That yield will increase as the dividends are increased, but that yield can only decrease if the amount of the dividend is lowered.
PEOPLES ENERGY
Peoples energy is a diversified energy company headquartered in Chicago and comprised of five business units : the core business, Gas Distribution and diversified businesses, power generation, midstream services, oil and gas production and retail energy services. The company has serviced gas to residential and business consumers in northeastern Illinois for 150 years.For the past 10 years peoples energy has increased its dividend on a regular basis. That is a very positive fact. Good dividend growth and stability are important for income producing stock. The dividend at a recent price of $44.63 per share was $2.16, resulting in an annualized yield of 4.81 percent.
UIL HOLDINGS CORPORATION
UIL Holdings Corporation is the holding company for the United Illuminating Company and United Resources."> United Illuminating Company is a New Haven-based regional distribution utility that provides electricity and energy related services to more than 320,000 customers in municipalities in the Greater New Haven and Greater Bridgeport areas, including American Payment Systems, United Capital Investments and United Bridgeport Energy.
UIL Holdings recently traded at price of $47.05 per shape. At a current annual dividend of $2.88, that is a current yield of 6.11 percent, which beats money markets, Certificate of Deposits and U.S. Treasuries. It is a yield high enough to worry about. Sure, you want the highest possible yield with income investing, but you also want that dividend to be secure and not be reduced in the near future.Stock analysis can be much more thorough than this, depending on how deeply the investor wants to dig into a company?s financial situation. Debt, new projects and future sources of revenue can also be examined. With electric utilities, nuclear and coal issues can be an important area of examination. However, companies that have been consistent in the past likely continue to be consistent unless an unusual situation arises.
Other Articles
