Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Here is last week's selection.
This week, I want to jump into the deep end of hearty dividends and take a look at why now might be the perfect time to scoop up Exelon (NYS: EXC) and its delectable dividend.
Exelon is part of what I refer to as the "dividend diva" sector: electric utilities. Utilities offer investors the unique advantage of stable cash flow in almost any economic environment. The reason is that electricity consumption is non-cyclical and necessary. These utilities do have input costs, which can vary and affect profits, but on the whole, many often remain profitable during economic downturns and most offer a substantial dividend.
That brings us back to Exelon, the largest provider of nuclear energy in the United States. Yes, I just said nuclear energy. Let's remember that nuclear is not a naughty word, nor have we seen a catastrophe like Chernobyl in quite some time. Nuclear is safe and clean, but has also become much more expensive to operate relative to other input fuels. Decade-low natural gas prices are persuading many utility companies to switch to natural gas for electrical generation, which has hurt Exelon's stock recently. Exelon won't take this lying down, however; it has options.
For one, Exelon relies on all types of fuels for energy generation, including fossil fuels, hydro, and renewable energy in addition to nuclear power. Through its purchase of Constellation Energy Group, which was finalized last month, its fuel input sources remain well-diversified.
Secondly, as the cost of nuclear power continues to rise in relation to other fuel sources, it's looking increasingly likely that the U.S. government may offer assistance. Keep in mind this is merely speculation on my part, but Exelon's executive chairman has hinted that in order to stay cost competitive, it may need the government to provide economic assistance. That assistance could come in the form of government subsidies or allowing the company to recoup costs of construction from its customers by charging higher rates. While Exelon isn't planning on building any nuclear reactors in the near future, the Nuclear Regulatory Commission recently approved competitors SCANA (NYS: SCG) and Southern Co. (NYS: SO) for two reactors apiece.
From a valuation perspective, Exelon simply looks like a smart buy, with the stock trading at historically cheap levels relative to where it's been over the past decade. Here's a quick comparison of how Exelon stacks up next to some of its utility peers:
|NextEra Energy (NYS: NEE)||1.7||6.4||12.6||3.8%|
|Entergy (NYS: ETR)||1.3||3.8||12.5||5.0%|
As you can see, you really can't go too wrong by purchasing a utility company. There are decent values with good dividends across the board. Entergy actually offers the lowest overall metrics of the bunch, but its 134% debt/equity was considerably higher than Exelon's 94%, which caused me to shy away from Entergy. NextEra Energy is even worse with a debt/equity of 156%.
Let's face it, though, the real reasons to own Exelon are its juicy dividend and predictable cash flow. Here's a quick glance at Exelon's dividend growth over the past decade:
Although Exelon's quarterly payout hasn't risen since November 2008, between 2002 and 2008 it did grow by a remarkable 141%. With a payout ratio of just 56%, there's plenty of room for future dividend growth when Exelon sees fit.
Utilities aren't going to offer the most exciting earnings growth, and they often don't keep pace with a rapidly advancing market. What they will do is let you sleep better at night and offer nearly unparalleled stability when the rug gets pulled out from underneath the stock market as tends to happen from time to time. Exelon could be the perfect stock to power up your portfolio.
If you're craving even more dividend ideas, I invite you to download a copy of our latest special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks," which is loaded with income-producing companies hand-selected by our top analysts. Best of all, this report is free, so don't miss out!
- Add Exelon to My Watchlist.
At the time this article was published Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. He thinks his dog has enough energy to power an entire city. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Exelon and Southern Company, as well as creating a covered straddle position on Exelon. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy that runs on hugs.
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