There are a lot of signs a recession may be coming. The well-off are going down market to buy groceries at Walmart, both Amazon and FedEx are laying off tens of thousands of workers -- before Christmas -- and retailers are seeing revenue rise because inflation caused prices to rise, not because customers are buying more goods.
In such times, investors turn to dividend stocks because of the stabilizing impact they have on a portfolio. Even when there is no capital appreciation, the income generated from dividends offsets the worst of any decline.
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Owning dividend-paying stocks is an all-weather strategy investors should employ. Over the past 50 years, 84% of the S&P 500's total return is a result of dividends and compounding. Data from Hartford Funds shows that, going all the way back to 1930, there has never been a single decade when dividend stocks in the index lost money.
Even during the so-called "lost decade" of the 2000s when the S&P 500 actually showed negative returns, dividend stocks showed modest gains over that time period.
So in good times and bad, dividends are a good investment, so long as you don't go chasing yield in an attempt to juice results. Often, income stocks sport a high yield because there are problems with the business. That doesn't mean to swear off high-yield stocks, since you can still find gems hidden among the debris, and it's why investors just might want to consider natural gas and water utility Northwest Natural (NWN -0.70%) as a stock to buy.
A steady program of growth
Focusing its business on the northwest states of Oregon and Washington, the regulated utility provides natural gas service to approximately 2.5 million people (hence the company name).
Founded over 160 years ago, Northwest Natural has evolved into a premier utility stock that also provides water service in the Pacific Northwest, Texas, and Arizona -- and, more recently, renewable energy solutions related to natural gas, such as biogas and landfill gas. The vast bulk of the company's revenue is derived from its traditional natural gas activities.
It owns approximately 14,000 miles of natural gas distribution pipelines, 700 miles of transmission lines, and 10,100 miles of service lines, along with several storage facilities, with over 18 billion cubic feet of capacity. It also has some 60,000 water connections serving 145,000 customers.
And because it is a utility, Northwest Natural naturally elicits yawns from investors because utilities tend not to be exciting stocks but rather steady performers. For my money, that lack of extreme volatility makes it an excellent investment.
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A fallback position
It's also why utilities were among the original so-called "widow and orphan" stocks, businesses that couldn't afford to take wild risks. While utilities have grown and expanded over time, Northwest Natural may be one that still fits the original mold.
For the most part, Northwest Natural doesn't have any competition other than the type of energy that customers may buy. But since residential and commercial customers purchase both their gas and their delivery services from Northwest, if its industrial customers buy their gas from some third-party marketer or supplier, Northwest isn't especially impacted. Natural gas is essentially a pass-through cost to customers, meaning Northwest's profit margins are not materially affected by the decision.
There can be lags in when profits will show up on the financial statements, however. Because it's a regulated utility, it is still subject to the whims of when (or if) regulators will approve rate hikes. While Northwest has had issues at times with getting rate hikes passed, in general the long-term trend has been always higher.
Dividend royalty
Perhaps the best part of Northwest Natural is its dividend. First paying it out in 1951, the utility has increased the payout every year for 67 consecutive years, making it a Dividend King. That's an elite group of only a few dozen companies that have increased their dividend for 50 years or more, and few companies have done so longer than Northwest Natural.
The dividend currently yields 4.1%, and its payout ratio, or the percentage of its profits that it pays out as a dividend, stands at 74%. While that would normally be considered high, a utility can often afford to pay out more of its profits than otherwise because of the general surety of its earnings growth.
Annual dividend increases might not be especially large -- Northwest's last hike was 0.5% -- but especially in Northwest Natural's case, it will continue to grow over time. For regularity and stability in what may be a tumultuous time, this Dividend King is one you may want to have reign over your portfolio for many years to come.
