The utility sector tends to be sensitive to interest rates because utilities generally make heavy use of leverage. With Wall Street expecting rates to fall, utility stocks have started to rise. That has lowered the dividend yield for some of these utility stocks.
But don't pass on the sector if you are looking for yield. There are still some attractive dividend options. The list includes Brookfield Renewable (NYSE: BEP) (NYSE: BEPC) , Black Hills (NYSE: BKH) , and WEC Energy (NYSE: WEC) .
Here's a quick primer on why these three high-yield utility stocks might make great buys in September.
1. Brookfield Renewable offers two ways to play
Brookfield Renewable hails from Canada and is backed by the investment powerhouse Brookfield Asset Management (NYSE: BAM) . Essentially, it is a way for Brookfield Asset Management to raise additional capital for investment in the clean energy sector . However, Brookfield Renewable also allows smaller investors to invest alongside one of the largest and most experienced infrastructure investors in the world. Brookfield Renewable's portfolio spans across the globe (North America, South America, Europe, and Asia) and across all of the major clean energy technologies (hydropower, solar, wind, and storage).
What's interesting here is that Brookfield Renewable has two classes of stock. There's the partnership unit with a distribution yield of 5.8% (BEP) and the corporate share class with a dividend yield of roughly 5% (BEPC). They represent the same entity; the difference in yield is based on demand for the corporate share class, which more investors are comfortable buying (some large investors, like pension funds, can't buy partnerships). The dividend backing that yield has been increased annually at roughly 6% a year since 2001.
A big yield, a generous distribution growth rate, and a long runway for growth as clean energy becomes more and more important to the global energy pie. What's not to like?
2. Black Hills is small but mighty
Black Hills is more of a traditional utility , offering regulated natural gas and electric services to 1.3 million customers in eight states. The stock yields roughly 4.4%, which is toward the high end of the stock's yield range over the past decade. From this perspective, it looks like the utility is on sale. However, the average utility yields around 3%, using the Utilities Select Sector SPDR ETF (NYSEMKT: XLU) as an industry proxy, so Black Hills also looks cheap relative to its peers.
The really interesting thing here, however, is that this relatively small regulated utility (its market cap is a modest $4 billion or so) happens to have one of the best dividend records in the utility sector. Black Hills has increased its dividend annually for more than five decades, making it a highly elite Dividend King . Dividend growth of around 5% a year over the past decade or so isn't too bad, either. And all of this from what is, basically, a very boring company. If you are looking for a utility that you can put on autopilot, Black Hills is one you need to look at today.
3. WEC Energy: Dividend growth and income
Last up is WEC Energy, which has the lowest yield of the three at roughly 3.6%. Don't dismiss it out of hand, that's still well more than the average utility. And the dividend has grown at a generous 7% a year over the past decade. The most recent increase, in January, was 7%. The company expects earnings to grow between 6.5% and 7% a year through at least 2028. The dividend is likely to grow at roughly the same pace as earnings.
That's a great combination of yield and dividend growth for investors who are looking at low-yield dividend-growth-focused utility stocks like NextEra Energy (which has a below-average yield of 2.5%). WEC Energy is a simple and boring regulated electric and natural gas utility (NextEra mixes a regulated utility with a clean energy business), operating in parts of Wisconsin, Illinois, Michigan, and Minnesota with 4.7 million customers. The yield may be a bit low for some dividend investors, but if you are interested in killing two birds with one stone, this dividend growth machine (it's increased its dividend annually for 20 years) should be on your radar.
If you look hard enough, you'll find it
There's no question that the utility sector has started to recover in price, but that doesn't mean the opportunity to find good dividend stocks is over. You just need to be more selective. Brookfield Renewable, Black Hills, and WEC Energy are all examples of the strong high-yield dividend stocks you can find if you take the time to dig in.
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Reuben Gregg Brewer has positions in WEC Energy Group. The Motley Fool has positions in and recommends Brookfield Asset Management, Brookfield Renewable, and NextEra Energy. The Motley Fool recommends Bausch Health Companies and Brookfield Renewable Partners. The Motley Fool has a disclosure policy .
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