Investors sometimes focus their attention a bit too keenly on growth. Often, a boring dividend stock can be a valuable addition to a portfolio, providing stability even when times are tough on Wall Street.
More than one way to get there
Investing is not a simple task. Most people can't buy a single stock and expect it to go to the moon, leading to massive wealth. The problem, of course, is that if you pick the wrong stock, you could lose all your money. This is why having a diversified portfolio is so important: Spreading your eggs across a few baskets will help you avoid catastrophic errors and increase the likelihood that you pick at least a few notable winners.
With rising interest rates, regulated utilities Duke Energy (DUK 0.03%) and Black Hills (BKH -0.73%) have seen their yields spike to attractive levels even though both companies still have solid long-term growth plans. Here's how the stocks for these two utilities can make you richer as they tread a slow and steady path through both bear and bull markets.
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Diversification is important
Here's the thing. Diversification is not picking 20 stocks in the same industry -- say, technology -- in the hope of finding the next Amazon. A diversified portfolio should comprise growth stocks (perhaps including technology shares) and more reliable stocks (like regulated utilities). Regulated utilities are generally pretty boring, offering reliable dividends and businesses that are protected from competition.
This is actually important. In exchange for monopolies in their markets, regulated utilities must get their investment plans and the rates they charge customers approved by the government. However, once they're approved, bull markets and bear markets don't have that much impact on those companies' business plans. The spending largely gets done as scheduled, and the rate hikes go into place.
In good markets or bad, utilities basically move steadily forward. They can be a reliable foundation for a portfolio that includes stocks in industries prone to volatility.
Even steady stocks can fall out of favor on occasion
And yet a few factors can make utility stocks a bit less desirable. They're largely seen as income investments, and rising yields generally put downward pressure on utility shares as other income options (like CDs) become more attractive alternatives. That's the case right now with Duke Energy and Black Hills, whose stock price declines have pushed their yields up to 4.5% and 4.2%, respectively. Historically speaking, those are fairly attractive dividend yields for both of these utilities.
Notably, Black Hills is a Dividend King with more than 50 years of consecutive dividend increases under its belt.
Duke Energy is, by far, the larger of the two, with a market cap of $69 billion. It operates electric and natural gas utilities across North Carolina, South Carolina, Florida, Indiana, Ohio, Kentucky, and Tennessee. Combined, it has a customer base of nearly 10 million. Right now, Duke is in the process of exiting some businesses that aren't regulated, so it is actually becoming even more boring.
Selling some assets, however, hasn't changed its long-term growth target for earnings to increase between 5% and 7% a year through 2027. That growth is supported by capital investment plans totaling $36 billion over the next five years. That spending backs the rate increases that should lead to slow and steady growth.
Black Hills is much smaller, with a market cap of $4 billion. It serves 1.3 million natural gas and electric utility customers across Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. The company's long-term growth target is for earnings to expand between 4% and 6% a year, with plans to spend $3.5 billion over the next five years.
What's notable about Black Hills, however, is that customer growth in its operating areas is, on average, more than twice that of the U.S. generally. It is pulling back a little on capital spending in 2023 so it can reduce debt, which likely upset some investors. However, over the longer term, it appears to be attractively positioned for success (even if it falls short of its growth target in any single year).
Slow and steady can be appealing
While Duke and Black Hills alone would take a long time to make you notably richer, the real attraction here is nuanced. Both are a bit out of favor right now and, thus, are offering historically attractive yields. The businesses, meanwhile, are likely to chug along no matter what is going on in the broader market.
Slow and steady progress isn't exciting, but it can provide a ballast for stocks that are more volatile and, perhaps, provide more growth potential. If you layer in boring utilities like Duke and Black Hills, you might just find your overall portfolio ends up materially stronger, helping you to end up materially richer.
