Many people buy utility stocks as defensive plays. They are stable companies, often having no competition in the region they serve, and can offer secure earnings, with predictable rate increases that are guaranteed (controlled) by the government. They usually pay a nice dividend, with a good yield, but a relatively low dividend growth rate (DGR). But in return for the stability and good yield of the utilities the investors are willing to sacrifice total return. I don’t think many people expect to beat the market by buying utilities. They look to collect nice dividends, with relatively low capital appreciation during bull markets while minimizing losses during bear markets. Although they certainly want the value of their portfolio to grow, they are willing to give up some total return in exchange for the safety of their investments. OK, perhaps I am making assumption about other investors, but that is how I always thought of utilities.

But is this necessarily the case? Can you have your cake and eat it too? Can you actually achieve market beating returns just by investing in safe, boring utilities? Previously I did a study showing that a stock with a good yield, a dividend that grows every year (even at a relatively slow rate) and that has all the dividends reinvested, would achieve excellent results, even if it was a slow growing stock like a utility. But that was just a model stock. Could it actually work in real life examples? I thought it would. I thought that if the utility stock has a good yield, raises its dividend every year, and you reinvest all those dividends, then on both an income basis and a total return basis the stock would perform very well. And I did a study to examine this question.

For this back test study I looked for utility stocks that had been raising their dividend for at least ten years in a row, and I followed them for the next ten years, to see how they performed. I took David Fish’s most recent CCC list (May 2013) and looked for utility stocks that had been raising their dividend every year for at least the past 20 years. That would mean that when the back test period started, in January of 2003, they would already have been increasing their dividend for 10 years. In other words, each one of these stocks had been raising their dividend, every year from at least 1993 through 2003. Using price and dividend data from Yahoo.com I followed these stocks from January 2003 up until June 2013, reinvesting all dividends, to see how they performed.

The utility stocks which in Jan 2003 had raised their dividend for at least 10 years in a row were Atmos Energy Corp (NYSE:ATO ), American States Water Co. (NYSE:AWR ), Black Hills Corp (NYSE:BKH ), Connecticut Water Services (NASDAQ:CTWS ), California Water Services (NYSE:CWT ), Con Ed (NYSE:ED ), Energen (NYSE:EGN ), MDU Resources Group (NYSE:MDU ), MGE Energy (NASDAQ:MGEE ), Middlesex Water Co. (NASDAQ:MSEX ), National Fuel Gas Co. (NYSE:NFG ), Northwest Natural Gas Co. (NYSE:NWN ), Piedmont Natural Gas Co. (NYSE:PNY ), SJW Corp (NYSE:SJW ), UGI Corp (NYSE:UGI ), Vectren Corp. (NYSE:VVC ), WGL Holdings (NYSE:WGL ), Aqua America Inc. (NYSE:WTR ).

$10,000 worth of each of these stocks was purchased (to the closest whole share) in Jan 2003, all dividends were reinvested on the ex-dividend day (as per Yahoo.com) and the stocks were held through June of 2013. Here are the results for each stock, as well as the return for SPY with all dividends reinvested (to be used as the Market return):