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2 Trends Supporting Dividend Growth for Utilities

Renewable energy and federal support for infrastructure investment should allow utilities to grow their cash payouts.

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Travis Miller: With interest rates on the rise, utilities investors aren't likely to enjoy the valuation uplifts that they've seen over the past few years. Instead, to get their cash total returns, investors are going to have to rely on the yields in the market right now and the growth of those dividends. In the utilities sector, we think there are two trends that can support that growth, and the yields right now are still attractive in the market.

One trend, we think will support the growth is renewable energy. We think renewable energy could grow 40% over the next eight years, and two names in particular we think will benefit are NextEra Energy and Xcel Energy. Both are building capacity for renewable energy and the infrastructure to deliver that renewable energy to large load centers.

The second trend we think will support dividend growth is more federal support for infrastructure investment. President Donald Trump is going to appoint three of the five commissioners at the Federal Energy Regulatory Commission. We expect those appointees and the commission on a whole to be more supportive of electric transmission development, gas pipelines, and competitive markets. This advantages the large-cap utilities in the U.S., in particular, Southern Company, Duke Energy, and Dominion Resources. All three have large balance sheets, trade about fair value right now, and offer growth in the dividends above 5%.

Travis Miller does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.