I’m looking to buy a stock I think can provide me with long-term dividend income. And I suspect it’s currently flying under the radar of most UK investors.
The company just increased its dividend for the 68th consecutive year, which tells me it’s a reliable cash generator. Despite this, the dividend yield is still over 5%.
Utilities
And the stock? Northwest Natural Gas Company (NYSE:NWN). It’s a US utilities company that generates most of its revenues from a natural gas transmission business.
Despite its strong track record, the stock is down 25% over the last 12 months, which is why the dividend yield has reached a level that’s catching my attention. So what’s going on?
The share price decline is the result of a few factors. One is that the company has significant physical assets and the inflation the US has seen makes these more expensive to build and maintain.
Another is that – like a lot of utilities businesses – Northwest Natural has significant debt. With interest rates rising, this has become more expensive, creating a risk.
Third, higher interest rates mean investors can get better returns on bonds in the short term. This creates less incentive to buy shares, especially at higher prices and with lower yields.
A buying opportunity?
To my mind, none of these things is a decisive consideration to put me off as a long-term investor. That’s why I’m looking to buy the stock in February.
It’s true that inflation is an issue for the firm. But Northwest’s regulated return gives it some ability to offset this via price increases without fear of customers switching to competitors.
Increasing interest expenses are also something to keep an eye on. But, in general, the predictable nature of earnings for utilities companies allows them to manage higher than average debt levels.
Lastly, investors absolutely can get good returns on cash and bonds right now. But this is going to go down over the next year, or so, whereas I think it’s unlikely with Nothwest’s dividend.
Dividend growth has slowed to an average of 0.5% per year over the last decade, so I wouldn’t expect anything spectacular. But at today’s prices, I don’t think it needs it.
US dividends
It’s worth noting that UK investors like me have to pay a 15% withholding tax on dividends from US stocks. So the yield I’d actually get would be closer to 4.5%.
Even with this borne in mind, I think there’s a good opportunity here, though. Investing well is about buying stocks when they’re cheap and I don’t see many opportunities to do that right now.
The utilities sector in the US is an obvious choice. Almost across the board, the combination of inflation and higher interest rates has been weighing on share prices recently.
Northwest Natural is the stock that stands out to me the most as a buying opportunity, though. It isn’t the best-known, but its track record is difficult to argue with.
