The childhood story of Tortoise and The Hare isn't just a lesson for kids. The same story can teach adults a few things about a way to approach investing. The story has many parallels as to how people invest. Personally, I prefer the "Tortoise" mentality of "slow and steady," specifically as it applies to dividends. Monthly, quarterly, and annual income for holding a stock is a great benefit, and there's one sector that tends to be the most stable: utilities.
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Slow and Steady
Utility companies are boring, but for investors looking for predictable dividend payouts, that's exactly what you want. Yes, you also want growth, and a company actively expanding their infrastructure and bringing in new customers will do that slowly, year over year.
Resilience
An advantage utility companies have is the ability to withstand most economic downturns. Most people don't stop paying for their electricity, gas and water. You can only go without those for so long.
The Competitors
It's great to talk about companies that are "slow and steady" while demonstrating "resilience," but what does that look like?
If you're unsure where to start, Dividend.com can help. You can easily filter stocks based on certain parameters, such as only companies with a payout ratio between 35-55%. Why this specific range? It's a sustainable ratio that shows the company is still retaining capital for growth. (Source)
A quick search gives us some good, solid choices:
- NextEra Energy (NEE)
- The Southern Company (CO)
- Duke Energy (DUK)
Picking A Winner
You can't go wrong with any of these, but diversification is the name of the investing game. So how do you pick just one? It's best to remain objective and look at a few key indicators.
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Volume: an indicator of general investor interest
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Payout ratio: 35-55% is the general sustainable range for dividends
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YTD Total Return: between dividend payments and stock price movement, this measures what investors have lost or gained in value from January 1st to present
As with all investments, you have to decide what you can afford to lose, how much volatility you're willing to ensure, and what your end goal is with the investments you're considering.
Utility company stocks won't give you the leaps and bounds in growth like the Hare, sprinting ahead at the start of the race. Instead, like the Tortoise, they'll give you predictable growth and a steady stream of income in the long-term.
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