Defensive Dividend Payers: POM, AEE, PGN, FE, SCG

Dividend seeking investors would do well to shop around in the utility sector of the S&P 500 if they are looking for high-yielding stocks with defensive characteristics.

A quick look at the sector reveals some handy dividend payers operating in the industry. These include Pepco Holdings (POM) with a 6% yield, Ameren Corporation (AEE) at 5.6%, Progress Energy (PGN) yielding 5.9% and FirstEnergy Corporation (FE) at 6%.

These utilities tend to have two things going for them: scale and pricing power. This translates into strong cash flows which are then returned to shareholders in the form of dividends. For example Ameren (AEE) delivers electricity and distributes natural gas to 1.2m customers in Missouri and Illinois while Pepco (POM) provides natural gas to nearly 1.9m customers in New Jersey, Delaware, Maryland, and the District of Columbia.

Throw in the fact that energy and natural gas are key markets for North American consumers, and you have a powerful base from which to build a profitable business model.

There has also been a lot of consolidation in the sector with a number of the players merging over the last 20 years as they attempt to extract benefits from merged infrastructure. This scale also gives them the benefit of pricing power when it comes to negotiating with both government and retail consumers and this is reflected in the tariff increases that these organizations have been able to push through in 2009 and 2010 despite the recessionary operating environment.

Many of these groups have also proven themselves to be quick to adopt new technologies including nuclear and other clean energy offerings which means they avoid the trap that many other state-owned utilities find themselves in when they much of their operating success is driven by consumer and industrial demand and there are signs that economic activity is picking up across the US.

This can be seen from comments made by Jimmy Addison, senior vice president and chief financial officer of SCANA Corporation (SCG) when he recently addressed shareholders at the presentation of second quarter earnings figures. He told investors: “Our service area continues to show signs of economic recovery, with second quarter industrial sales of electricity up nearly 15 percent compared to the same period last year. Additionally, we completed several key milestones this quarter, including the successful execution of a $300 million equity forward sale and completion of our retail electric rate case.” SCANA (SCG) primarily distributes electricity in North and South Carolina.

If dividends are your game and you are happy to settle for investments which offer low volatility and movements in stock prices then taking a look at the utility sector may be something to consider.