Electric Utility Stocks have long been a favorite of income-oriented investors, and for good reason. The average yield of stocks in this industry is normally well above the Value Line median.

Although current income is the primary allure for most electric utility investors, these companies have other attractive aspects, including their defensive nature. In difficult economic times, consumers may run their air conditioners less, but they still want to keep the lights on. Indeed, most electric utility stocks are less risky, and less volatile, than nonutility issues, though this is certainly not to say they’re risk free —no investment is. Of course, there are tradeoffs. Although these issues are well suited to risk-conscious income investors, capital appreciation is usually limited, making them unfit for growth accounts.

To create our list, we ran a simple screen of stocks in the Electric Utility industry to find those with yields of at least 4.5%. We also required that all issues were trading above $5.00 a share, and to help ensure the dividends were sustainable, we limited the results to those companies with long-term debt as a percentage of total capital below 55%. Investors should keep in mind that stocks with a high yield are not necessarily more attractive than those with a low yield. The yield is a measure of valuation, and a high yield simply indicates that the stock may be cheaper, not necessarily better. Indeed, a significantly above-average yield on an Electric Utility stock is often an indication that there is at least one matter of concern with the company. Our screen returned 12 names, a few of which are highlighted below.

American Electric Power

American Electric Power (AEP) is one of the largest electric utilities in the United States. It owns nearly 38,000 megawatts of generating capacity and the nation’s largest electricity transmission system, a 39,000 mile network serving over 5 million customers in Arkansas, Kentucky, Indiana, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia, and West Virginia.

AEP is in the midst of several organizational and leadership changes. After hiring new CEO Nick Akins in early November, it began reinvesting in the transmission system to ensure efficient and reliable service and pursue growth opportunities inside and outside of its current territory. Management hopes new transmission projects allowed by the upgrades will fuel earnings growth in the coming years. The company is also focused on making acquisitions as evidenced by its agreement to acquire BlueStar energy in early January.

Recently, AEP reached a settlement calling for distribution rate hikes in Ohio totaling $70 million. Rate activity is occurring in other jurisdictions as well. In Virginia, the utility was granted a rate increase that will take effect at the start of February. Additional rate cases are pending in Michigan and Indiana. Value Line electrical utility analyst Paul E. Debbas, CFA, says AEP is significantly underearning its allowed return on equity in those regions. Debbas believes that rate relief and modest growth in customer usage should benefit the bottom line in 2012. 

The company has a history of strong and steady dividend payouts, with hikes that started again in the second quarter of 2010. In fact, the board of directors raised the dividend once more in the fourth quarter of 2011, by a cent (a 2.2% increase). American Electric Power is planning on a payout ratio of 50%-60%, which would considerably boost this equity’s already above-average (compared to the Value Line median and the industry-average) dividend yield (currently at 4.8%).

Ameren Corporation

Ameren Corp. (AEE) is a holding company that was formed in 2004 via the merger of Union Electric and CIPSCO. It currently serves over 2.4 million electric and nearly one million gas customers in Illinois and Missouri. Ameren companies generate a net capacity of 16,600 megawatts of electricity, making it the largest electric power provider in Missouri.

Like many of its contemporaries, the company cut its meaty dividend in the face of the 2007-2009 recession. The payout was slashed from $0.635 a share, to $0.385 a share in the first quarter of 2009. However, as the economy recovered, so has the dividend payout. In fact, the company raised the dividend in the last quarter of 2011 to $0.40 a share, the first hike since 2009. The board of directors has indicated that moderate hikes are likely to be the norm going forward, a good thing for income-oriented investors. Furthermore, this equity should garner interest despite its past lack of growth, as currently, the dividend yield is a full percentage point above the electric utility industry average (and thus well above the Value Line median).

Debbas expects Ameren to experience a slight earnings decline in 2012. This assumes that a drop in non-utility income and a return to normal weather after a hot summer in 2011 outweigh a rise in utility profits and the absence of expenses for an early retirement program and a refueling outage at the Callaway nuclear unit. Over the long term, combined with the dividend growth we project over the 3- to 5-year period, this issue should provide a total return that is slightly above the industry norm.

Avista Corporation

Avista Corp. (AVA, formerly called The Washington Water Power Company) is the smallest of the group highlighted here. It supplies gas and electricity to eastern Washington and northern Idaho, with over 600,000 customers served.

The company has been undergoing a number of rate cases recently. It reached an agreement in Washington where that state’s regulatory commission permitted electric and gas rate increases of $20.0 million (4.6%) and $3.75 million (2.4%), respectively. This was a ‘‘black box’’ settlement in which an allowed return on equity and a common-equity ratio were not specified. A similar agreement was reached in Idaho, which is not surprising considering that frequent rate cases are the norm for Avista. Indeed, the utility has not been earning an adequate return on equity for a long time and is trying to catch up to capital spending and rising expenses.

Avista is unique among its peers as it did not slash or stall its dividend payout during the recession. Indeed, dividends have grown steadily from 2007 onward, and in 2009 they actually went up $0.03, from $0.18 to $0.21 a share. In 2010, the payout was hiked from $0.21 to $0.25, and in 2011, it rose to $0.275. The board has indicated that investors should expect such steady increases going forward. That said, this utility has the lowest dividend yield of those highlighted, clocking in at 4.6%, which is still above the industry average, as well as the Value Line median. Income-oriented investors who are willing to wait to see the yield grow should find this equity of interest.

At the time of the article’s writing the analyst had no issue in the companies named above.