The Dividend Yield Trap

Higher payouts aren't enough over the long term.

The past two years witnessed the ascendancy of dividend yield in the valuations of U.S. electric utilities. The recent primacy of yield in utility-industry valuations is the product of a unique confluence of factors. The collapse of most of the industry's non-regulated growth initiatives has resulted in a market that attributes little value to the industry's growth prospects beyond that which has been historically generated by the expansion of rate base-1 to 3 percent. To the degree that non-regulated growth is credited in the current market, such credit is principally limited to conservative, incremental strategies and even then such strategies are often discounted by the market.

The industry's low regulated growth profile, coupled with the absence of credible, broad-based non-regulated growth strategies, remains the most important strategic issue confronting the industry today.