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Utilities have fallen out of favor with investors in recent years. Surging interest rates have made lower-risk investment options like government bonds and bank CDs more attractive.

However, now could be a great time to buy utility stocks. Most of them offer higher-yielding dividends that they appear likely to continue increasing in the future. The Southern Company (NYSE: SO), Consolidated Edison (NYSE: ED), and Brookfield Infrastructure (NYSE: BIP)(NYSE: BIPC) stand out to a few contributors for their dividends. Here’s why they think income-focused investors should take advantage of the current market mood and scoop up these utilities.

Southern’s dividend could start going north

Reuben Gregg Brewer (The Southern Company): Southern’s 22 years of annual dividend increases don’t do the company full justice on the dividend front. That’s because the dividend has been held steady or increased annually for 76 consecutive years, making it a highly reliable passive-income stock. The dividend yield, meanwhile, is around 4.1% today, which is well above the average utility’s 3.5%, using Vanguard Utilities ETF as a proxy.

What’s most interesting about this giant U.S. utility is that it has nearly completed the large, over-budget, and long-delayed Vogtle project. This capital investment involves the construction of two large-scale nuclear power plants. One is already online, with the other slated to be attached to the grid late this year or in early 2024. When that happens, Vogtle will go from a cash drain to a cash generator. Management expects a $700 million cash-flow lift.

Some of that money will probably go to debt reduction and some to other capital investment projects. It’s highly likely, however, that the board will also consider higher dividends. Over the past decade, Southern’s dividend has grown at a compound annualized rate of about 3%. That’s enough to keep up with inflation and keep it shareholder friendly given the headwinds from the troubled Vogtle project. If dividend growth were to tick up to 5% or 6%, though, it would make an already attractive dividend paying utility even more attractive.

On its way to dividend royalty

Matt DiLallo (Consolidated Edison): Consolidated Edison doesn’t get the respect it deserves from investors. The utility has increased its dividend for 49 straight years. That’s the longest streak of consecutive dividend increases among utilities in the S&P 500 index. It also has the company one year shy of joining the elite group of Dividend Kings.

Despite that exceptional track record, shares of Consolidated Edison have fallen about 7% in the past year, even though the S&P 500 has rallied almost 15%. That decline has also pushed its dividend yield up to 3.5%, more than double that of the S&P 500.

Consolidated Edison took a step to capitalize on its decline by launching a $1 billion accelerated share repurchase agreement earlier this year. That’s enough to repurchase over 3% of its outstanding shares at the current market cap. The company funded that buyback with some of the $6.8 billion in proceeds from selling its clean-energy business.

The rest of that capital will help fund the company’s investment plans to reduce its emissions and enhance the operations of its core electric and gas utilities in the New York/New Jersey region. It envisions investing $72 billion over the next decade across its operations on clean energy, climate resilience, core service, and customer engagement projects. Those investments will grow its earnings, enabling Consolidated Edison to continue increasing its dividend. That visible growth makes Consolidated Edison a very low-risk utility to buy for steadily rising dividend income.

Neha Chamaria (Brookfield Infrastructure Partners): Brookfield Infrastructure owns and operates a diversified portfolio of assets around the globe in not only utilities but also businesses that exhibit utility-like qualities, such as railroads and toll roads, natural gas assets, and data infrastructure.

All of these assets share one common characteristic: They generate stable cash flow under long-term, often regulated, contracts. At least 90% of Brookfield’s funds from operations (FFO) from utilities, transport, and data are contracted or regulated, while it’s 80% for midstream energy. The company also sells mature assets periodically to reinvest the proceeds, and when combined with its steady cash flows, that strategy has helped Brookfield self-fund most of its growth so far.

That’s a solid business profile, and Brookfield Infrastructure Partners has made the most of it since it was formed in 2008 after being spun off from Brookfield Asset Management. Its stock price reflects that growth. Yet investors who have owned units of the partnership wouldn’t have made so much money in the past 15 years if it weren’t for dividends.

BIP data by YCharts

Brookfield Infrastructure has grown its dividend at a compound annual rate of 9% between 2012 and 2022, backed by 11% growth in FFO per unit, or share. Those dividends won’t stop growing anytime soon; the company is targeting annual dividend growth of 5% to 9% in the long run.

However, despite that growth potential in FFO and dividends, Brookfield Infrastructure stock hasn’t received much love and is down about 22% in one year, as of this writing. Its corporate shares, Brookfield Infrastructure Corporation, are down by about the same percentage. With units of the partnership and corporate shares also yielding high yields of 4.8% and 4%, respectively, this one’s an attractive utility stock with a great dividend track record.

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Matthew DiLallo has positions in Brookfield Asset Management, Brookfield Infrastructure, and Brookfield Infrastructure Partners. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Southern Company. The Motley Fool has positions in and recommends Brookfield Asset Management. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

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