The utility sector rallied strongly in 2024, with the average utility stock yield falling from around 3.6% to the current rate of around 2.8%. While that’s still better than the 1.2% you would collect from the S&P 500 index, you can do much better.
For example, even after a rally, Black Hills Corporation(NYSE: BKH) still yields roughly 4%. And Brookfield Renewable(NYSE: BEP)(NYSE: BEPC) is yielding as much as 5.6%. Here’s why each one is a no-brainer buy for income investors.
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When it comes to utilities, Black Hills is about as plain vanilla as they get. The company operates regulated natural gas and electric utilities, serving 1.3 million customers across parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming.
The big goal is just to provide reliable power, nothing else. Well, perhaps aside from rewarding investors with reliable dividend growth, noting that Black Hills is a Dividend King with over five decades’ worth of annual dividend increases under its belt.
Image source: Getty Images.
In addition to being one of the very few utilities to have achieved the elite status of Dividend King, there is a list of things to like about Black Hills. For example, the regions in which it operates are seeing population growth that is around three times faster than overall population growth in the United States.
More customers are a double benefit since they mean more revenue but also help support requests for more capital spending. As a regulated utility, Black Hills must ask the government for approval of its rates and spending plans. At this point, Black Hills has a five-year investment plan worth $4.3 billion. That’s pretty sizable, given the company’s $4.6 billion market cap.
The combination of population growth and spending is expected to help Black Hills grow its earnings between 4% and 6% a year for the foreseeable future. Dividend growth will likely track along with earnings growth over time. So, you collect a historically high 4% dividend yield and get roughly 5% dividend growth, which combined hint at a total return of around 9%. Not bad for a boring little utility.
The next investment up isn’t technically a utility, though it does generate and sell electricity. Brookfield Renewable is one of the world’s largest owners and operators of clean power, selling power to companies and utilities under long-term contracts.
It is a bit unique in that investors can buy a partnership share class with a yield of 5.6% or a corporate share class with a yield of 4.6%. They represent the same entity; the yield difference is related to demand for the corporate structure (institutional investors are often barred from owning partnerships, for example).
Brookfield is really a one-stop shop for clean energy investing. Its portfolio includes hydroelectric, solar, wind, and nuclear energy and storage, and its operations span North America, South America, Europe, and Asia.
What’s a bit unique here is that Brookfield Renewable is managed by Brookfield Asset Management, a large institutional money manager with a long history of investing in infrastructure assets on a global scale. Brookfield Renewable is, basically, a way to invest alongside Brookfield Asset Management.
What that means on a practical level is that Brookfield Renewable’s portfolio is actively managed. It likes to buy assets when they are cheap, improve them (by recapitalizing them and enhancing their operations), and then sell them if it can get a good price. It then repeats the process. Yes, there is ground-up construction, but even there, the same opportunistic investment approach applies. Brookfield Renewable is pretty much the exact opposite of boring Black Hills.
That said, investors have been well rewarded on the dividend front at Brookfield Renewable. Management targets 5% to 9% annual distribution growth, with the rate over the past two decades coming in at around 6%. Add 6% to the 5% or so dividend yield, and you get roughly 11%, a touch higher than the long-term return investors generally expect from the stock market.
To be fair, an investment in Brookfield Renewable probably entails a bit more risk than a regulated utility like Black Hills. But given the ongoing shift toward clean energy, there seems to be a long runway for growth ahead. All in all, the risk/reward balance seems tilted in favor of investors here.
Neither Black Hills nor Brookfield Renewable are quite as attractive as they were following the utility rally. But that shouldn’t dissuade you from looking at these two high-yield investments. They remain attractive if you are trying to maximize the income your portfolio generates today and would like to benefit from dividend growth down the line.
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Reuben Gregg Brewer has positions in Black Hills and Brookfield Renewable Partners. The Motley Fool has positions in and recommends Brookfield Asset Management. The Motley Fool recommends Brookfield Renewable and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
