One Utility Stock That Beats the Market Consistently
In the stock market, you can do well as a conservative, blue chip investor. You don’t need to speculate in gold, oil, or technology to generate good rates of return. As always, the keys to successful stock market investments are good timing and owning a business that’s growing its earnings.
A lot of conservative investors who are saving or are already in retirement buy utility stocks because of the consistency of their earnings growth and their typically higher dividends. Especially for those investors looking for income, the higher dividends associated with utility stocks are attractive.
One utility with a great long-term track record on the stock market is The Southern Company (NYSE/SO), which is based in Atlanta and operates a number of different plants that generate electricity. The company boasts a great track record of increasing earnings and dividend payments to shareholders; and on the stock market, it has performed more like a growing technology stock. The company’s long-term chart is below:
Chart courtesy of www.StockCharts.com
Of course, the real wealth creation from Southern for investors has come from its increasing dividends, which have been going up consistently. The company’s earnings growth is also relatively consistent; as you might have noticed on the stock chart above, the company has performed considerably better than you might expect from a utility stock.
Owning the right business that’s growing its earnings is key to wealth creation on the stock market. I would argue that a utility like Southern Company is worth considering when it’s down in value. The company has an excellent dividend reinvestment plan (DRIP).
During the 1990s, utilities were shunned by investors who were more interested in earnings growth from technology stocks. But after the stock market had its bubble burst, utility stocks once again became attractive for obvious reasons. The consistency of earnings and dividend growth was desirable, and still is today.
Right now, the stock market isn’t expensively priced, given current earnings, but there is very little real economic growth in the marketplace. Accordingly, dividend income is becoming a much more important component of total return on investment.
I look at this stock market, and what I would like to see is a major correction—not because I’d short the market, but because I’d like to see more attractive entry points for investors. A lot of stocks are trading right at their 52-week or all-time highs, and this makes it difficult to be a buyer.
In the age of austerity and very little growth, consistent earnings and dividend growth is very important; institutional investors will continue to be buyers of utilities like Southern, even if it’s just to beat the rate of inflation.
There’s always room for one or two highfliers in a stock market portfolio, but the market has proven that you can do very well over the long term owning the right dividend paying blue chips. For me, I like consistency in earnings growth and stability in operational growth. Southern has handily outperformed the S&P 500, especially over the last 10 years—and that doesn’t include dividends. Blue chip investing is still very much a profitable endeavor.