Utilities have been a staple piece of portfolios for many years. In some ways, these power-generation companies and electric utilities have replaced traditional certificates of deposit and other income-generating investments. Duke Energy Corp. (NYSE: DUK) comes in as a powerhouse among the utilities, and Tuesday morning this giant made a strong move.
The company announced that it will increase its dividend. The new dividend will be $0.825 quarterly, which is a yield of roughly 4.5%, or $3.30 on an annualized basis. This is an increase of 3.8% from the previous level. The dividend previously had a yield of about 4.4%, paying out $3.18 annually, or $0.795 quarterly.
Currently the long-term target dividend payout ratio continues to be in the range of 65% to $70%.
This is an interesting time for Duke to hike its dividend. The stock has suffered over the course of the first half of 2015, and so far this year the stock is down 11%. On the horizon there is also the potential for a rate hike by the Federal Reserve.
Deutsche Bank expects the Fed to start hiking rates in September and continue through 2016. The firm also thinks the climb in long-term yields will be limited, the yield curve actually flattens and fed funds will be at 2% and the 10-year Treasury yield at 3% by the end of 2017. If so, then utilities are a great place for yield investors to stay put or initiate positions in.
Duke is the largest market weighted stock in the S&P 500 utilities at 8.62%. It is one of the leading U.S. utility companies, given its stable earnings base, as a significant portion of the company’s earnings are derived from regulated operations. Also, the company has delivered a healthy financial performance in the past and remains an attractive option for income-seeking investors.
Lynn Good, president and CEO of Duke, said:
For the past 89 consecutive years, the dividend payment has been an important part of our commitment to deliver attractive total returns to shareholders. The strength of our cash flows and balance sheet provides valuable financial flexibility to continue growing the dividend.
Operational excellence in our core domestic businesses continues to provide strong support to our financial objectives. Even though we are experiencing some near-term earnings challenges in our International business, we have a plan to distribute $2.7 billion of foreign cash by 2022, providing further support for our growth initiatives and the dividend.
Duke shares were up 1.5% Tuesday morning, at $73.96 in a 52-week trading range of $69.48 to $89.97. The stock has a consensus analyst price target of $81.18.