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Southern Company: Invest While The Yield Is Still High

Summary Blue-chip utility Southern Company yields over 4.5%. Southern Company has healthy relations with regulators. The southeast region is one of the fastest-growing regions in the U.S. Bonus: Live fully functioning earnings and price-correlated graph on Southern Company. Introduction In consideration of today’s low interest rate environment, fixed income securities offer little in the way of return. Moreover, the safety characteristics normally associated with fixed income are also potentially upside down. Since early 1982, the interest rates available with fixed income have been in a continuous freefall. This has presented both good and bad news for the conservative investor desirous of a high and safe income stream on their portfolios. The good news is that bond prices move inversely with interest rates. Therefore, when interest rates drop, as they have done since 1982, the prices of previously issued bonds will rise. Therefore, fixed income investments, primarily bonds, have provided the opportunity for high yield and either capital appreciation or at least stable prices. This falling interest rate trend has gone on for more than three decades, and as a result, fixed income returns have been abnormally strong and even high. However, the first part of the bad news is that fixed income investors need to understand that previously issued bonds will move to a premium valuation as rates are dropping, but will eventually move back to par when they mature. Consequently, the only way to lock in capital appreciation in addition to your interest income would be to sell your bonds before they mature. Otherwise, temporary capital gains created by falling rates will inevitably dissipate to breakeven levels. As a result, investors that hold bonds to maturity will in effect suffer losses of purchasing power due to inflationary forces. On the other hand, the additional bad news is that falling interest rates result in the inability to reinvest in newly-issued fixed income instruments at rates that are attractive. But the worst bad news is that those investors purchasing fixed income at today’s extremely low rates are exposing their capital investments to potential losses in a rising interest rate environment. Investors need to understand that bond prices fluctuate just as stock prices fluctuate. If future interest rates move higher, and if that were to happen quickly, originally issued bond prices could drop just as much as stock prices did during the Great Recession. Bonds are considered safe because they mature at par; however, bonds are also liquid. Therefore, bond prices can, and do, fluctuate between their issue date and maturity. Fairly Valued Utility Stocks for Income and Safety Consequently, and as the result of the fixed income dynamic discussed above, I have been, temporarily at least, eschewing fixed income. In other words, I have been recently looking for viable alternative income-producing opportunities. Importantly, I am just not focused on finding higher income streams; I’m also concerned about finding income-producing alternatives with reasonable safety characteristics. I believe that carefully selected utility stocks can fit the bill, as long as they are purchased at sound or attractive valuations. Stocks and bonds are different investment types and therefore possess different investment merits and characteristics. In other words, I believe it would be a stretch to state that utility stocks are perfect fixed income alternatives. On the other hand, utility stocks, when purchased at sound valuation, do possess and/or share characteristics with bonds that are similar enough to consider them a reasonable alternative. When interest rates are at normal levels, bonds pay higher interest income than most blue-chip dividend paying stocks provide in dividend yield. Furthermore, since bonds provide an implicit guarantee of returning principle at maturity, they also provide a level of safety not normally associated with stocks. However, it is also true that all dividend paying common stocks are not the same. Utility stocks are generally regulated monopolies, and as such, have a history of producing reliable and consistent earnings growth and above-average levels of dividend income. Nevertheless, even though the earnings growth on utility stocks is generally consistent and reliable, earnings and dividends generally do not grow very fast. Regulation provides consistency and a level of reliability, but at the expense of higher or above-average growth potential. Southern Company High-Yield Sound Valuation Southern Company (NYSE: SO ) is a blue-chip utility stock that is considered one of the strongest among its peers. The two primary reasons supporting this view are the relatively friendly regulatory environment they operate in, and the better-than-average economic fundamentals associated with its region. Headquartered in Atlanta, Southern Company dominates the power business serving both regulated and competitive markets across the southeastern region. For example, Zacks considers Southern Company one of the largest and best managed electric utility holding companies in the United States. Operating in one of the fastest-growing and strongest regions of the country, Southern Company is a holding company for four regulated Southern electric utilities that serve about 4.4 million customers. Those utilities are Georgia Power, Alabama power, Gulf Power, and Mississippi power. Additionally, Zacks estimates that Southern Company’s impending acquisition of AGL Resources (NYSE: GAS ) could double its customer base and generate more revenues. However, this additional growth potential is slightly mitigated by what many consider the high valuation (approximately $28 billion) they paid for AGL. The following earnings and price correlated graph on AGL illustrates the premium valuation that Southern Company is paying. (click to enlarge) On the other hand, when looked at from the perspective of the 3- to 5-year trendline growth estimates for AGL Resources, the valuation that Southern Company might be paying appears more reasonable. These long-term growth estimates may in fact be reasonable, and more importantly, could provide a meaningful benefit to Southern Company. Considering that Southern Company currently generates approximately 40% of its power from coal-fired plants, the AGL acquisition could provide a breath of fresh air (pun intended). According to MorningStar: “If the AGL deal closes, Southern will operate 7 gas LDCs, including a core Georgia business and a large LDC in Illinois, while gaining stakes in two midstream gas projects with upside to more.” MorningStar also believes that: “Southern Company operates in the business friendly Southeast, where its relatively low power prices and sterling reputation help to foster a constructive and stable regulatory atmosphere.” The following Short business description courtesy of S&P Capital IQ provides further insight into Southern Company and its businesses: “The Southern Company, together with its subsidiaries, operates as a public electric utility company. It is involved in the generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources in the states of Alabama, Georgia, Florida, and Mississippi.” “The company also constructs, acquires, owns, and manages generation assets, including renewable energy projects. As of December 31, 2014, it operated 33 hydroelectric generating stations, 33 fossil fuel generating stations, 3 nuclear generating stations, 13 combined cycle/cogeneration stations, 9 solar facilities, 1 biomass facility, and 1 landfill gas facility.” The company also provides digital wireless communications services with various communication options, including push to talk, cellular service, text messaging, wireless Internet access, and wireless data; and wholesale fiber optic solutions to telecommunication providers in the Southeast. The Southern Company was founded in 1945 and is headquartered in Atlanta, Georgia.” The biggest negative I see with Southern Company relates to issues within their nuclear power businesses. Cost overruns on their Georgia Power nuclear projects, principally Vogtle, do raise some concerns. However, I think those concerns are exaggerated given the diversity of Southern Company’s diverse electric generating businesses. Investing In Utility Stocks at Sound Valuation Is Critical When investing in low-growth companies like utility stocks, getting valuation right is even more critical. Just as it is with all companies, utility stocks can become overvalued from time to time. However, since utility stocks do not grow very fast, overpaying for future earnings can dramatically destroy the dividend income advantage that utility stocks typically offer. Paying too much for a low growth enterprise can easily result in long-term capital losses and future earnings will generally not be large enough to bail you out. You can test this statement by utilizing the following live earnings and price correlated Southern Company graph. Bonus: Live Fully-Functioning Historical F.A.S.T. Graphs on Southern Company In order to assist the reader in understanding Southern Company’s current valuation and historical operating achievements, I offer the following live fully functioning historical F.A.S.T. Graphs on the company. Furthermore, to get maximum benefit from this exercise, I offer the following tips on how to utilize and navigate the live graph. At the top of the graph, there are orange rectangles representing different historical time frames. For example, you can click on the orange rectangle 10Y and the graph will automatically draw a graph over 10 calendar years. Therefore, you can quickly move from one time frame to the next and evaluate changes in earnings growth rates and historical normal P/E ratio valuations over each respective time frame. There is also a scrollbar at the bottom of the graph that allows you to focus on any historical time frame of your choosing. At the bottom of the graph, there is a long orange rectangle that allows you to take the graph apart or rebuild it by simply clicking on any of the words. For example, if you click on the word “Price,” monthly closing stock prices will be taken off of the graph and you can replace them by simply clicking on the word “Price” again. You can do this with all of the items located in the orange rectangle. But most importantly as it relates to the thesis of this article (valuation) the graph also has a built-in performance calculation feature. Simply point and click your mouse on any price point on the graph (the black line) until a red dot appears. Then simply move your mouse to any other price point on the graph and click it and a pop-up will appear with the calculation of the performance over the time frame you chose. To erase the calculation, simply point and click on your second red dot and you will be ready to perform another calculation. Note: all these calculations are based on purchasing and holding one share of the company’s stock. I suggest the reader utilize this calculation function feature in order to evaluate the effects that valuation has on long-term performance. You can measure periods of time from high valuation to low valuation (when price is above the orange valuation reference line), from low valuation (when price is below the orange valuation reference line) to high valuation, etc. As you perform these calculations, notice the effect that various levels of valuation have on long-term performance over time. I hope you have fun performing these various calculation exercises, and I hope they reveal and solidify the important effect that valuation has on long-term returns when investing in utility stocks. Southern Company’s Income Advantage The following detailed performance report on Southern Company since 1996 illustrates the significant income advantage it has provided shareholders compared to an equal investment in the S&P 500. Total cumulative dividend income from Southern Company would have been almost twice as high as the index would have provided. However, due to the low earnings growth rate that Southern Company (and utility stocks in general) has generated, higher yield came at the expense of capital appreciation. Nevertheless, in contrast to long-term bonds held to maturity, Southern Company did produce some capital appreciation in addition to its high dividend income generation. (click to enlarge) Reinvesting Dividends in High-Yield Southern Company Levels the Playing Field The above historical performance report on Southern Company validates the income advantage that a blue-chip utility stock investment can provide. However, for those investors focused more on total return, a low growth high yield utility stock like Southern Company can level the total return playing field – if you reinvest your dividends. As the following performance report on Southern Company with dividends reinvested each quarter illustrates, the high income advantage remains. On the other hand, the capital appreciation (total return) advantage that the index held without reinvesting dividends disappears. With dividends reinvested, the total return on Southern Company and the S&P 500 end up in a virtual dead heat. I believe this validates the power and protection that high-quality high-yield dividend paying stocks offer. This is especially true when a low growth high yielding utility stock like Southern Company is originally invested in when valuation is sound. On that note, I would like to add that both Southern Company and the S&P 500 were soundly valued at the beginning of 1996. Therefore, the return comparisons over this time frame are apples to apples from a valuation perspective. Additionally, the virtual tie in total return between Southern Company and the S&P 500 happened even though Southern Company only grew earnings at 2.5% while the S&P 500 grew earnings at 6.1% over the same time period. (click to enlarge) Additional supporting fundamental metrics on Southern Company Returns on invested capital (ROIC) is an important consideration when evaluating utility stocks. After hitting a low point in the last fiscal quarter of 2014, Southern Company has been steadily improving each quarter in 2015. I consider this a comforting accomplishment. (click to enlarge) In concert with an improving return on invested capital, Southern Company’s bottom line has also been steadily improving throughout 2015. Southern Company’s net profit margin per quarter (npmq) in 2015 has increased from 7.04% to 17.6% in their most recent quarter ending in September 2015. (click to enlarge) Southern Company’s revenues for quarter (revq) have also been improving throughout 2015. Importantly, revenues had recovered to 20-year highs in 2014, and 2015 is on track to be even higher. (click to enlarge) But perhaps most importantly, since I’m attracted to Southern Company for its dividend yield, cash flow per quarter (cflq) strongly support dividends for quarter (dvq). Southern Company is a Dividend Challenger on fellow Seeking Alpha author David Fish’s CCC lists that has raised its dividend for 15 consecutive years. Moreover, southern company has paid a dividend every quarter since 1948. (click to enlarge) Summary and Conclusions I consider Southern Company a strong and healthy utility stock that can currently be purchased at a sound and attractive valuation. At current levels, its dividend yield is approaching 5%, and I believe this represents an opportunity for investors in need of current income. Consequently, I would recommend purchasing Southern Company as long as its yield remains above the 4.5% level or better. In today’s low interest rate environment, a current yield above 4% with the potential for modest capital appreciation to fight inflation looks attractive. Southern Company, like most utilities, is not offered as a high total return opportunity. Instead, I suggest that is most suitable for those investors, including retired investors, that are looking for high current income and reasonable safety. Disclosure: Long GAS Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Expanding The Smart Beta Filter: Does It Help?

Summary iShares factor ETFs provide a source of well tested algorithms for factor-based stock selection. Previous examination of QUAL, MTUM and USMV have shown that this approach can produce actionable investing ideas. Can adding other, well-documented, factors improve the selective powers of this approach?. I continue to think about mining the iShares smart beta ETFs for investing ideas. In this article, I want to discuss expanding the source of data to include ETFs for risk premium factors beyond those I looked at previously. Let me start by reviewing some recent results from this exercise. My starting premise is that the set of ETFs offered by Blackrock iShares emphasizing individual risk-premium factors provides a rich source of securities that have passed their quantitative filters for the target factors. Previously I looked at three of these ETF focused on low volatility, quality and momentum factors. My goal was to find stocks that appeared in the holdings from more than one of these ETFs with the idea that such stocks have passed the MSCI index screen for more than one factor. I identified 14 stocks that occur in all three ( A Quest for the Smartest Beta ) and 60 more that occur in at least two ( Can We Find Smarter Beta From 2 Factor Portfolios? ). I found the results intriguing. First, The ETFs all beat the market, as represented by the SPDR S&P 500 Trust ETF ( SPY), as does the equal-weighted portfolio of ETFs. By analyzing a hypothetical portfolio, I was able to show that the 14 holdings from the set occurring in all three ETFs has soundly beaten all of the ETFs as well as the equal-weighted portfolio of the ETFs. This is fully documented in the second article referenced in the previous paragraph. Readers commented on my omission of two of the classic risk-premium factors and offered suggestions on incorporating them into the models. The missing factors, value and size, are, of course, important, and I’m going to look at how much, if anything, they add to the exercise as I go on. But first, let me digress here for a paragraph or two and consider why I felt these factors could, or should, be left out. Let’s start with the objective: It is to mine the quantitative algorithms of MSCI’s factor indexes for high-potential stocks. As I explained in the second article, I wanted to keep this exercise to a manageable number of funds and holdings. I thought three was optimal. Also, value and size are much less straightforward to deal with in this context. These factors form the basis for the traditional classifications of stocks: Value vs Growth and Large-, Mid-, Small-Cap. It’s the Morningstar style box. Value is variously defined and it’s not at all unusual to see the same securities turning up in growth and value funds from the same group. Size is easy, but pairs poorly with other factors depending on how one makes size cuts. By contrast, quality, momentum and low volatility are less rigorously defined (even considering the vagueness of how value is defined) and, in my view, more amenable to quantitative analysis that can produce unique, actionable results. So, I went with quality, momentum and low volatility. Quality is something I’ve been thinking about a lot, and I like the algorithm QUAL is using to define the factor (discussed here ). Momentum is another factor that can add serious alpha. I’ve been maintaining some momentum-based investing strategies in moderate-size portfolios using commission-free ETFs for several years to modest success. A problem with momentum is it tend to generate volatility and I’ve tried to modulate that in my own investing by adding a weighting for volatility (some day I may write an article on this). This reflects my appreciation for low volatility and the thinking that led me to include USMV in this project. The Factor ETFs All this is a bit subjective and intuitive, which is always something to guard against in an evidence-based approach, so I’ve decided to take readers’ advice and look at two more of iShares MSCI factor-index funds. I wanted to see if adding value and size to the analyses can improve the results. To this end, I’ll be deconstructing five ETFs looking for common holdings. The list of five, starting with the three considered earlier: iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ), iShares MSCI USA Momentum Factor ETF (NYSEARCA: MTUM ) iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ) iShares MSCI USA Value Factor ETF (NYSEARCA: VLUE ) iShares MSCI USA Size Factor ETF (NYSEARCA: SIZE ) One problem right off the bat is the size of SIZE. At 636 holdings, it’s nearly four times the size of the next largest fund (USMV with 165). Perhaps as a consequence, it adds little value to the analysis, although, despite having 636 holdings, it is the least correlated with the broader market of the five ETFs. (click to enlarge) Pay particular attention to the last column in that table. SIZE is the least correlated with SPY, much lower than I would have anticipated. Note too, that VLUE is less correlated with SPY than any of the other three ETFs. I’ll start by looking at the performance of these ETFs and ask if the two new additions look likely to add any value. (click to enlarge) For the past year, they have lagged the previously considered three. But this has not been a good year for value stocks, and SIZE may add an advantage from that low correlation coefficient that will only become evident when it becomes an important variable. Deconstruction the ETF Portfolios As I did previously, I downloaded the full holdings of each of the ETFs into a spreadsheet and analyzed all five for stocks that appeared in more than one of the funds. Here’s a summary of the results. As anticipated, it quickly gets unwieldy. Only a single stock is in all five funds, and there are 20 that appear in four of the ETFs. Beyond that, there are too many to be useful for my purposes. What’s interesting is the 14 stocks that formed the basis of the earlier analysis by occurring the holdings of QUAL, MTUM and USMV, are all included in the 21 four- or five-fund stocks here. Thirteen of the 14 occur in either VLUE or SIZE; only one is in both. So, if we take the top 22 stocks here, i.e. those occurring in at least four funds, we have added eight to the previous list. So far, so good, we have increase our candidate pool; but not excessively, it’s still a manageable number. Here, for the record, are the 22 stocks with the 14 from MQLV set in italics: Axis Capital Holdings Ltd (NYSE: AXS ), Accenture Plc (NYSE: ACN ), Ace Ltd (NYSE: ACE ), Arch Capital Group Ltd (NASDAQ: ACGL ), Assurant Inc (NYSE: AIZ ), AT&T Inc (NYSE: T ), Chevron Corp (NYSE: CVX ), Chipotle Mexican Grill Inc (NYSE: CMG ), Chubb Corp (NYSE: CB ), Eli Lilly (NYSE: LLY ), Home Depot Inc (NYSE: HD ), Nike Inc Class B (NYSE: NKE ), O’Reilly Automotive Inc (NASDAQ: ORLY ), Partnerre Ltd (NYSE: PRE ), Reynolds American Inc (NYSE: RAI ), Sigma Aldrich Corp (NASDAQ: SIAL ), Starbucks Corp (NASDAQ: SBUX ), Target Corp (NYSE: TGT ), Travelers Companies Inc (NYSE: TRV ), United Health Group Inc (NYSE: UNH ), Visa Inc Class A (NYSE: V ), WR Berkley Corp (NYSE: WRB ). The first entry, Axis Capital, is the single name in all five ETFs. Sector representation is dominated by Financials and Consumer Discretionary, but it is more diverse than the set of 14 derived from three ETFs. (click to enlarge) Here is how these 22 stocks are allocated among the ETFs. As we see, all are in SIZE. SIZE is therefore acting as a binary filter to select among funds that are in three of the four funds but do not pass the size-factor filter. This is potentially a useful filter. USMV holds all but one, so it’s a similar filter. VLUE is a stronger filter. Less than half the funds are in VLUE’s holdings. I find this interesting and would have expected a result like this from MTUM, which only misses four, none of which is likely to be mistaken for a momentum stock in the current market. As I refine my thinking on this whole exercise, I have to spend more time considering how VLUE affects results. Portfolio Analysis As previously, I wanted to see the results of this filtering process. There is only one record to analyze. The funds rebalance at the end of May and November and, to my knowledge, do not publish past index allocations. Thus, there is only one analyzable record, that for the current cycle which is about 5 months old. We can see how various permutations of these results have fared since the last rebalance. I ran analyses on Portfolio Visualizer for equal-weighted portfolios comprising the following with the coding I’ve used in the tables: Five ETFs: 5ETFs EW QUAL, USMV, MTUM: 3ETFs (QVM) EW Stocks present in holdings of at least 4 of the ETFs: VQMVS(4+) VQMVS(4+) stocks in QUAL and MTUM only: QxM VQMVS(4+) stocks in QUAL and VLUE only: QxV VQMVS(4+) stocks in MTUM and VLUE only: MxV I pulled out the last three sets because USMV and SIZE were doing little more than serving as a final filter for the other three ETF holdings’ overlaps, so I thought it useful to see how those components were contributing to the results. Here are those results. (click to enlarge) As we can see, the five ETFs as an equal-weighted portfolio beat SPY, but lagged the subset of three ETFs. Let’s not forget, however, that this is only a five-month result. Longer term results can show benefit to holding all five factor ETFs, or at least four of them. For this we do have a longer record. The full record is still limited as the youngest fund only dates to July 2013. From July 2013, equal-weighted portfolios, rebalanced semiannually, of combinations of five, four and three of the ETFs turned in the following performance results. (click to enlarge) Removing either SIZE or VLUE added return and reduced maximum drawdown. Removing both, i.e. going to only QUAL, MTUM and USMV, as previously considered, improved both metrics. Volatility did increase slightly, but in all cases it remained lower than the S&P 500. These results indicate that there has been no advantage to adding VLUE or SIZE to a factor-based ETF portfolio. I’d like to say this validates my decision to use only MTUM, QUAL and USMV in my analyses, but the fact remains that the data set is too limited to draw such a conclusion. Let’s return to the previous table – and our main topic – and see how stocks filtered from the ETFs on the basis of their presence in four or more funds fared. Over the past five months, the combined ETFs returned 1.40% CAGR for all five, and 5.75% CAGR for the MQLV three. A portfolio of the 22 stocks found in four or more ETFS 29.67% CAGR and did so with a max drawdown of only -3.35% vs. -6.52% for the better performing of the two ETF portfolios. Separating out the component ETFs we see that the combination of QUAL an MTUM added a remarkable level of value, far outpacing a combination of either of the two factors with value as represented by VLUE. Yet again, I must emphasize the limited data available. But the results certainly begin to suggest that these ETFs, especially MTUM, QUAL and USMV, are attractive sources for filtered lists of stocks that rank strongly for risk-premium factors which can be further filtered for having been selected by the quite different quantitative criteria by multiple funds.

Exploring The Highest-Yielding, Dividend-Raising Utility

In a screen for the highest-yielding, dividend-raising utility I came across a Houston-based company with a 5%+ dividend yield. This company has provided solid investment results over the past decade. This article looks at what you might expect moving forward based on the company’s commentary. For dividend-oriented investors, David Fish’s list of Dividend Champions, Contenders and Challenges is the place to get your bearings. It’s nice because it provides you with a great subset of the types of securities you might be looking for: companies that have not only paid but also increased their dividend payments for at least 5, 10 and 25 years. Still, there are hundreds of names from which you can explore. As such, it can be helpful to whittle down the list to discover pockets of the investing world one by one. As an example, you might organize the list by utilities and then by “current” dividend yield. Naturally screens come with a bevy of limitations, but for exploration sake they work quite well. If you completed this exercise, you would notice that CenterPoint Energy (NYSE: CNP ) happened to be the highest-yielding, dividend-raising utility. Let’s explore. Tracing its roots back to 1866 , CenterPoint Energy began as the Houston Gas Light Company. Today the company has more than 7,400 employees serving more than 5 million customers. The business operates in four basic areas: natural gas distribution, electric transmission, natural gas sales and heating and cooling services. The largest segment is the Texas utility serving the Houston area, hence the utility category. However, the company also has a 55.4% limited partner interest in Enable Midstream Partners (NYSE: ENBL ), a natural gas and crude oil infrastructure pipeline. Incidentally, this also explains why CenterPoint has an above average yield – even when compared to other utilities. The payout ratio is well above average, and the share price has declined materially during the last year. Let’s take a look at the company’s history moving from 2005 through 2014: CNP Revenue Growth -0.6% Start Profit Margin 2.3% End Profit Margin 6.6% Earnings Growth 11.7% Yearly Share Count 3.7% EPS Growth 8.7% Start P/E 19 End P/E 17 Share Price Growth 6.9% % Of Divs Collected 54% Start Payout % 60% End Payout % 67% Dividend Growth 10.1% Total Return 10.0% The above table demonstrates an interesting story. On the top line the company actually had lower revenues in 2014 as compared to 2005. Yet this alone did not prevent the company from generating solid returns. The quality of those sales improved dramatically, resulting in total earnings growth of nearly 12% per year. Ordinarily this number is boosted by a reduction in share count. In the case of utilities, the opposite usually occurs. CenterPoint Energy has been no exception: increasing its common shares outstanding from about 310 million in 2005 to almost 430 million last year. As such, the earnings-per-share growth trailed total company profitability – leading to almost 9% average annual increases. Investors were willing to pay a lower valuation at the end of the period, resulting in 6.9% yearly capital appreciation. Moreover, investors saw a 3% starting dividend yield grow by 10% annually, resulting in total returns of about 10% per annum. In other words, despite the lack of revenue growth and P/E compression, shareholders still would have enjoyed a solid return. This was a direct result of strong underlying earnings growth and a solid and increasing dividend payment. Moving forward, looking at the investment with a similar lens can be helpful. Since the end of 2014, both the share price and expected earnings have declined materially as a result of the broader energy environment. For this fiscal year the company has provided full-year earnings guidance of $1.00 to $1.10 per diluted share – well below the $1.40 earned last year. Still, the company has indicated that it expects to keep the dividend at its current rate, resulting in a 90%+ payout ratio for the time being (this simultaneously equates to 60% to 70% utility operations payout ratio). Moreover, CenterPoint has indicated that it expects to grow its dividend in-line with EPS growth (forecasted at 4% to 6% annually) through 2018. This isn’t speculation on my part or a collection of analyst’s estimates. Instead, its what the company is telling you to expect. Granted they could certainly turn out to be incorrect, but it should be somewhat reassuring given their greater stakes, more to lose, higher company knowledge, etc. Here’s what the next three years of dividend payments could look like with 5% annual growth: 2016 = $1.04 2017 = $1.09 2018 = $1.15 In total an investor might expect to collect $3.28 in aggregate dividend payments, or roughly 18% of the recent share price. Without any capital appreciation whatsoever, this would equate to 5.6% annualized returns. With a future earnings multiple of say 17, this would equate to a total yearly gain of about 8.9% over the three-year period. This is how I’d begin to think about an investment in CenterPoint Energy. You might perform a similar screen and come across the company. Yet this alone does not mean that it’s a worthwhile opportunity. Just because a company has an above average yield doesn’t mean that it’s a great investment. There are other factors at play. However, it does mean that the “investing bar” is relatively lower. A higher starting dividend yield, especially when coupled with reasonable growth, means that a good portion of your return will be generated via cash received. In this case you could see 5% or 6% annual returns without any capital appreciation. From there, if capital appreciation does come along, your investment returns start to approach the double digits. Finally, it’s important to be prudent in these assumptions as the slower growing nature of the business creates an out-sized emphasis on the valuation paid. You could see years of slow or moderate growth outweighed by compression in the earnings multiple. As such, a cautious approach is likely most sensible: expecting to receive a solid and above average dividend yield without the simultaneous anticipation of wide price swings to the upside.