Here’s some time-tested advice for savers of all ages: The best investments you’ll ever make are often the obvious ones most people overlook in their haste to get rich quick.
I speak from experience. In August 1993, I began to participate in Dominion Resources’ (NYSE: D) dividend reinvestment plan. My investment thesis hinged on Northern Virginia’s bullish demographic trends and resilient economy—factors that would drive earnings and dividend growth over the long haul. Reinvesting dividends also put the power of compounding interest to work, with each quarterly disbursement adding to my stake in the well-positioned utility.
By the time I was ready to harvest some of my gains to help pay for my son’s college education, Dominion Resources’ quarterly dividend had increased by 10 times and the stock’s value had grown by a similarly astounding multiple.
It wasn’t an entirely smooth ride. Dominion Resources’ acquisitions of Consolidated Natural Gas in May 1999 and Louis Dreyfus Natural Gas in November 2001 exposed the company to volatile businesses that were locked in a downturn. In late 2002, these missteps forced the company to sell assets and complete a massively dilutive equity sale to preserve the utility’s investment-grade credit rating.
Fortunately, Dominion Resources systematically reduced its operating risk over the intervening years and increased its earnings and dividends through consistent investment in the energy infrastructure needed to meet demand from its growing customer base. These efforts have paid off: During the Great Recession, Dominion Resources grew its quarterly dividend by 26.8 percent—an impressive show of strength.
Dominion Resources’ stock should continue its winning ways. Over the coming years, the company stands to benefit from two key growth drivers: the transition from coal to natural gas among electric utilities and the increasing adoption of renewable energy.
Dominion Resources’ Atlantic Coast Pipeline—a joint venture with Duke Energy Corp (NYSE: DUK) and AGL Resources (NYSE: GAS)—will transport natural gas from the prolific Utica Shale and Marcellus Shale to utility customers in Virginia and North Carolina.
The utility will likely rely on Dominion Midstream Partners LP (NYSE: DM), the master limited partnership (MLP) in which it owns an equity and general-partner interest, to help finance its portion of the project.
Despite the turmoil in the energy sector, Dominion Midstream Partners has remained in investors’ good graces and boasts both a low distribution yield and an elevated ratio of price to operating cash flow—an ideal financing vehicle and a rarity among MLPs.
Dominion Resources’ recent acquisition of Questar Corp (NYSE: STR) gives the utility another growth platform.
Over the intermediate to longer term, management expects Questar’s gas utility and interstate pipeline assets to benefit from the Environmental Protection Agency’s (EPA) Clean Power Plan, which should help clean-burning natural gas to win market share from coal in Utah and Wyoming.
The blockbuster deal also increases the visibility of Dominion Midstream Partners’ growth prospects. Management estimates that about 70 percent (roughly $425 million) of Questar’s operating cash flow comes from assets that could be housed at the MLP. (Read more about this transaction in What You Need to Know about Dominion Resources’ Acquisition of Questar Corp.)
These investments should ensure that Dominion Resources’ shareholders continue to benefit at multiple levels from growing demand for inexpensive natural gas in underserved markets.
The company’s investments in solar power also hold a great deal of promise, especially after the federal government extended tax breaks for solar power and many states adopting renewable portfolio standards.
However, the solar-power industry’s prevailing business model appears to be broken. Formerly high-flying SunEdison (NYSE: SUNE) will file bankruptcy in coming weeks, if not days. Sunrun (NSDQ: RUN) and Vivint Solar (NYSE: VSLR), a former takeover target of SunEdison, appear to be destined for a similar fate.
Meanwhile, SolarCity Corp (NSDQ: SCTY) continues to lose more money with each incremental sale.
These challenges open the door for Dominion Resources and other utilities, which continue to take advantage of their existing customer relationships and superior cost of capital to win market share. (See In the Land of Infrastructure, Capital is King.)
It’s no coincidence that leading solar-power outfit SunPower Corp (NSDQ: SPWR) signed on as one of the main sponsor’s of the Edison Electric Institute’s 50th annual financial conference last year. (See my takeaways and best investment ideas from this must-attend industry event.)
Like fellow components manufacturer First Solar (NSDQ: FSLR), SunPower’s management team understands that cooperating with incumbent utilities–not competing with them–will ensure the company’s future.
Dominion Resources has committed to building 400 megawatts of solar-power capacity in Virginia by 2020. But if contracts inked with Amazon.com (NSDQ: AMZN) and Microsoft Corp (NSDQ: MSFT) are any indication, the company may exceed this target by a considerable margin. More important, salutary relations with Virginia regulators ensure that Dominion Resources’ renewable-energy investments add immediately to earnings.
Management’s guidance calls for capital expenditures on grid upgrades, solar power and gas-related infrastructure to drive annual dividend growth of 8 percent to 10 percent through 2020.
Although Tesla Motors (NSDQ: TSLA) has developed impressive battery technology and the impending launch of its Model 3 electric car has generated a great deal of excitement, the stock trades at 7 times sales—a lofty valuation for a company that lost almost $7 per share last year.
The carmaker deserves plaudits for its innovations, but investors shouldn’t view the stock as the best way to bet on the future of the electric car or even energy storage.
Why take a chance on cash-bleeding Tesla Motors and its overhyped stock when shares of AES Corp (NYSE: AES), an electric utility and the world’s leading owner and operator of energy-storage capacity, trade at 0.5 times sales and yields almost 4 percent?
Overblown concerns about AES Corp’s exposure to Brazil overlook management’s efforts to de-risk operations and shore up the balance sheet by divesting noncore businesses and cutting costs. Progress on this front makes AES Corp a good buy for aggressive investors.
And if electric cars do replace the gas guzzlers in American garages over the long haul, the future looks even brighter for utilities, which will benefit from the necessary investments in grid and generation capacity to meet this uptick in demand.
Proven business models, highly visible cash flow and generous dividends—utility stocks offer all these advantages, plus exposure to a number of secular growth trends. Why pay top dollar to bet on an uncertain future with Tesla Motors and other innovators when you can take a safe ride on the same trend with companies that will be there for the duration?
Whether you’re a retiree seeking reliable income or a young investor beginning to build your nest egg, utility stocks are ideal vehicles for building sustainable wealth over the long term.