Friday, May 21, 2010

Diving for Dividends

“When the going gets tough, the tough get going.”

Investors may not be feeling very tough these days after taking repeated blows in the shins and several other body parts over the past three years or so. When the equity market sells off as it has in the last three weeks, investors may not get tough but the smart ones do begin looking for bargains. In my view, this is a great time to buy dividends on the cheap. I like looking at the utility sector first.

Great Plains Energy, Inc. (GXP: NYSE) operates a coal-fired utility plant in Missouri, serving 800,000 customers in 47 counties. New retail rates boosted revenue in the first quarter 2010, but investors have been slow to respond. The stock is trading at 10.4 times forward earnings and offers a yield of 4.8%.

Otter Tail Corporation (OTTR: Nasdaq) has diversified into a variety of renewable energy sources, bringing its coal-fired power generation down to 74% of the mix. The company has also diversified into other industries, including manufacturing and health care. At the current price level the stock is trading at 11.9 times forward earnings and yields 6.1%.

There also two interesting names in the water utility sectors. Neither are the highest yielding companies in the sector, but both offer good value. American Water Works Company, Inc. (AWK: NYSE) delivers water to over 16 million people in 35 states and Manitoba and Ontario, Canada. The stock is trading at 12.9 times forward earnings and offers a yield of 4.2%. Consolidated Water Company, Ltd. (CWCO: Nasdaq) operates a desalination plant in the Grand Cayman Islands.

Potentially high capital spending requirements to upgrade old, leaky water lines is an issue for the water industry. However, American Water Works has been more proactive than most in planning for its future and as a newer water utility operating in a small geography, Consolidated is not playing catch-up in distribution upgrades.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. $AWK $CWCO $OTTR $GPX

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