Southern, Pepco and Con Edison Offer Low Beta, High Reward
NEW YORK ( TheStreet) -- A recent study from Morningstar concluded that stocks get less risky the longer investors hold them. Still, the article recommends buying broad indexes rather than individual equities. But stocks with high dividend yields and low betas in the utilities sector such as Southern Company
As detailed previously on TheStreet, recent studies by asset management firm Russell Investments found that low-beta stocks, or those that moved up and down the least in price, outperformed others over time. If a publicly traded company is doing well there is no reason to sell the stock, hence the low beta.
Southern Company (0.07), Pepco Holdings (0.17) and Consolidated Edison (0.16) all have betas that are far below the market average of 1.
The high dividend yield results in even less reason to sell for the shareholder.
According to legendary investor Jack Bogle, who founded the Vanguard mutual fund family, dividend income has provided well over 45% of the historic total return for an average equity. Southern Company (4.77%), Pepco Holdings (5.25%) and Consolidated Edison (4.57%) have dividend yields at least twice that of the average S&P 500 stock (which returns less than 2%).
If a stock has a high dividend yield, there is even less reason to sell. Why get rid of a high-yielding investment in a low interest rate environment? This makes even less financial sense when capital gains taxes are factored in if the shares are sold at a profit.
Time is definitely on the side of those owning Southern Company, Pepco Holdings and Con Edison.
The Morningstar study also reported that owning stocks is becoming more rewarding over time . After studying more than 100 years of returns in over 20 countries , the researchers concluded that a diversified portfolio of assets is perhaps not as necessary as once thought. That is why previous articles on TheStreet have reported on why stocks with a history of increasing dividends are far, far superior to bonds , especially for retirement income needs.
The dividend growth rate rewards long-term shareholders. Over the last five years, the dividend growth rate has been 3.69% for Southern Company, 0.86% for Consolidated Edison, and 0.04% for Pepco Holdings. Consolidated Edison and Southern Company are both "Dividend Aristocrats," which means each has increased its dividend annually for at least the past 25 years.
Utilities are known as "widow and orphan stocks" due to the steady returns. But, for the past month of market action, Pepco Holdings is up more than 10%. During that same period, Southern Holdings rose by nearly 5%. Consolidated Edison spiked higher by over 3.6% for the last four weeks of trading. For the long term, moreover, shareholders should expect an even more rewarding total return from stocks such as these with high dividend yields and low betas.