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The Best Utility Dividend Stock for a Lifetime of Passive Income

Dividend stocks are the all-weather tires of the stock market. They perform well when the sun is shining and keep your portfolio from sliding into the ditch during the inevitable storms that blow through. And these days everyone seems to expect the market will be running into a downpour. Inflation is at 40-year highs, gas prices average $5 a gallon nationally, the Federal Reserve just imposed its largest rate hike in over two decades, and a survey of the nation’s chief financial officers says a recession is unavoidable.

Study after study reinforces the idea that dividend stocks outperform non-payers by a wide margin, with a recent survey by JPMorgan Chase finding stocks that initiated and then raised their payouts over a 40-year period between 1972 and 2012 returned an average of 9.5% annually, versus just 1.6% for non-dividend-paying stocks. Similarly, the asset managers at Hartford Funds found dividend-paying stocks contributed 41% to the total return of the S&P 500 going as far back as 1930. Even during the so-called “lost decade” of the 2000s, dividend stocks gained 1.8%.

And with a market crash on so many people’s tongues, there’s no stock that’s been raising its dividend longer than American States Water (NYSE: AWR), a water utility primarily serving Southern California by providing clean water and electricity.

Image source: Getty Images.

An unparalleled track record

American States Water was founded in the notable year of 1929, meaning it’s gone through the Great Depression, a world war, numerous recessions, and many other catastrophes. 

It’s also experienced some of the greatest bull markets, and through it all has shared its profits with investors. The utility has paid a dividend for 86 years — an unbroken string of 344 quarterly dividend payments starting in 1931 — and has raised it for 67 consecutive years.

While that makes it a Dividend King, or a company that’s raised its payout for 50 years or more, American States Water really stands as the king of kings. No company has a longer track record of dividend hikes.

Although the utility targets a long-term compound annual growth rate of 7% for its dividend, it’s actually achieved a near-10% growth rate over the past decade. At Friday’s closing price, the dividend yields 2% annually.

Still beholden to regulator whims

Of course, dividends aren’t everything. They’re important, but investors would also like to see capital appreciation. While American States Water will rarely compare favorably with your go-go growth tech stocks, what you get instead is a steady grower — albeit with some ups and downs along the way.

American Water’s most recent earnings report is a case in point, as revenue of $108.5 million that generated profits of $0.38 per share missed analyst earnings expectations of $0.54 per share on revenue of $122 million.

But the regulated utility says the shortfall was caused by a delay in approval of rate increases by the California Public Utilities Commission, which must sign off on all such increases. It’s been waiting for the new 2022 rates to be approved for months, so its current results are based on 2021’s rates. If and when they’re approved, the new rates will be retroactive back to Jan. 1.

Even so, American Water says had the new rates been in effect, it would have collected nearly $9 million more in revenue and profits would have been $0.47 per share, meaning both still would have been below expectations — just not the big miss it seemed to suffer.

A fighting chance

While supplying water to homes and businesses represents two-thirds of American Water’s revenue, it’s not the utility’s only business. It also has 50-year contracts with the U.S. government to provide water to 11 military bases, which account for another 25% of total revenue. The rest comes from generating electricity.

American Water is involved in negotiations on privatization at a number of bases and expects the federal government to put even more military bases up for bidding over the next few years. Based on its track record, which extends back to 2004, it believes it can win additional contracts to provide more bases with water.

All this means American States Water is the kind of stable long-term investment that income-seeking investors should be looking for. With the economy possibly sliding into a recession within the next year, this dividend stock ought to provide the kind of traction a portfolio needs.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Rich Duprey has positions in American States Water. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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