Recessions can be really challenging periods. A contracting economy causes companies and consumers to pull back on spending. One of the first cuts many economically cyclical companies make is to their dividends.
However, other companies are more recession-resistant. One sector known for its recession resistance is utilities. That's evident by the dividend histories of top utilities like Consolidated Edison (NYSE: ED), NextEra Energy (NYSE: NEE), and Southern Company (NYSE: SO), which have all increased their payouts for more than 20 years in a row, periods which included some severe recessions. Because of that, they're great stocks to buy if you're concerned that a recession is nigh.
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Through its various local utilities, Consolidated Edison provides electricity and natural gas services to the New York City region and surrounding areas. The company generates very stable earnings backed by government-regulated rate structures. Meanwhile, the region's electricity and gas demand has grown steadily, even during recessions.
That has enabled Consolidated Edison to increase its dividend very consistently. This year was the 51st consecutive year that it hiked its payout. That kept it in the elite group of Dividend Kings, companies with 50 or more years of annual dividend increases. It also extended its record for the longest consecutive yearly streak of dividend increases of utilities in the S&P 500.
Consolidated Edison is in a strong position to continue growing its dividend. It has a conservative dividend payout ratio for a utility (55% to 65% of its adjusted earnings) and a strong balance sheet. That gives it the financial flexibility to continue investing in expanding its utility infrastructure to support the growing demand for electricity and natural gas in the New York City area.
NextEra Energy operates the country's largest electric utility (Florida Power & Light), which generates stable rate-regulated earnings. On top of that, the company has a leading competitive energy platform (NextEra Energy Resources), which owns an extensive portfolio of renewable energy assets that generate stable cash flow backed by long-term, fixed-rate contracts. Those stable and growing cash flow sources have enabled NextEra Energy to increase its dividend every year over the past three decades.
The company has grown its payout at a roughly 10% annual pace over the past 20 years, which should continue. NextEra Energy is targeting to deliver around 10% annual dividend growth through at least next year. It can deliver that robust dividend growth rate thanks to its lower dividend payout ratio and the earnings growth it has ahead. The company expects to grow its adjusted earnings per share by 6% to 8% annually through 2027.
Powering that growth is the strong and rising demand for power, especially from cleaner sources. NextEra Energy plans to invest a massive $120 billion into energy infrastructure like new renewable energy capacity over the next four years.
Southern Company operates several electric and natural gas utilities across the South that generate very stable rate-regulated earnings. The company also has a competitive energy business and provides fiber and connectivity solutions. These businesses produce predictable cash flow from long-term, fixed-rate contracts and supply it with potential opportunities for additional growth.
The utility's stable and growing cash flow profile has been on full display over the decades. Southern Company has paid a dividend equal to or greater than the previous year for 77 years. Meanwhile, it has increased its payment for 23 years in a row.
That growth will likely continue. Southern Company plans to invest $63 billion through 2029 to maintain and expand its utility operations to support growing power demand in the South. These investments should power 5% to 7% annual earnings growth, which should support continued dividend increases.
Utilities operate very recession-resilient businesses because demand for electricity and gas tends to rise steadily even in a recession. Meanwhile, governments set the rates they charge, which they increase over time to compensate utilities for their heavy investment in maintaining and expanding their infrastructure. Because of that, they produce stable and growing cash flow to support rising dividend payments. That durability makes utilities a great way to diversify your portfolio to help mute some of the impact of future recessions.
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Matt DiLallo has positions in NextEra Energy. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
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