dividend investing strategy

How to Maximize Returns on High Dividend Utility Stocks

August 15, 2012

Utility stocks are big, defensive and pay a solid income stream in virtually all market conditions. If you look at the top performing SPDR funds over the past 10 years, investing in utilities has returned over 10% per year and clocks in at second place being placed under energy.

When you consider the lackluster performance of the Energy ETF over the past one and five year periods, utilities look even more attractive.


For many investors, buying utility stocks that pay out high dividends is enough of a strategy. But are you selling yourself short by not considering a couple other metrics that could maximize growth? Can you beat the Utilities Select Sector SPDR ETF with a little more strategizing?

Strategize With Utility Dividend Stocks

Some people get that glazed look in their eye when you talk about strategy. They assume you mean some complex system with Jacob’s Ladders and mathmatical tables that look like a game of Sudoku. Instead, I prefer to err on the side of simplicity since every moving part adds another possibility for a mistake. That is not to say you shouldn’t have a well thought out system… the point is that if you can create a suitable system in 4 steps, don’t make it 10 steps just because you can.

Our system starts on a very basic premise where we target high dividend yielding utility stocks by doing the following: we limit our choices to the top 10% dividend yielding firms in the market and we only select from the Utility sector. This gives us anywhere between 25 and 75 companies to choose from depending on the year and market condition. Of these companies we select the best 10 based on a ranking system that looks at sentiment, growth and value in bull markets while favoring quality and low volatility in bear markets. This simple strategy alone has delivered an annualized total return of 16.72% over the past decade.

In addition to this easy to follow system I add two more rules that should lower our downside risk:

  1. Set a minimum ranking threshold so that companies must exceed a certain level to be purchased. This will prevent buying when the entire utility sector is overvalued. If this is not used, you are simply buying the best 10… but the best 10 apples in the compost pile could still be rotten.
  2. When buying new companies, choose from those which have a reduced correlation to the rest of your holdings. This will prevent loading up in highly correlated market drops and should add some diversification for smoother price moves.

10 Year Utility Strategy Portfolio Performance

Our maximum loss is only 11.5% and our annualized return is over 21%. True, we typically hold stocks for 4 months instead of one year as our turnover increases but the reduction of risk and increase of returns should adequately compensate for the extra effort and trading costs.

High Dividend Utility Stocks

What sort of stocks does this portfolio hold? Let’s examine a couple of companies with a couple of valuation ratios.

Exelon Corporation (EXC)

Exelon is a holding company that engages in the generation of electricity in the USA and also deals in natural gas. The forward dividend yield is 5.5% with 87% of profits being paid out for that yield. Some recent earnings downgrades have weighed heavily on the share price. The price to earnings ratio is still in decent value territory but is rising due to falling profit. Relative book value continues to go into the region of deep value.

The recommendation to buy EXC was on July 9th 2012 and shares have returned almost 5% gain since then.


Another company picked up on July 9th was Public Service Enterprise Group Inc. (PEG) which is also a diversified utility firm. As you can see on the chart below the price to earnings ratio is hovering around 12 and dividend yields are reaching up to the healthy 4.4% range.

Electrifying Portfolio Results

Does it make sense to be judicious and add some defensive stock picks in the current troubled economy? Yes. Are high yielding dividend stocks a sound method of returning value to shareholders? Absolutely. Should you simply buy a large basket of utility companies or an ETF and forget about it? Seeing as how I have done the grunt work for you and created the Defensive Utility Portfolio which is easy to follow, why sell yourself short? Come trade with me and experience the low volatility, high annualized returns by using the services at Portfolio Cafe.


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