High Yield Showdown: Dominion vs. Black Hills

There is much more to consider about a dividend stock than just its dividend yield. This is clearly shown when you compare Black Hills Corporation (BKH -1.29%) and Dominion Energy (D -0.83%). Ultimately, yield will be less important here than future dividend prospects and the company’s track record when making a final call. Here’s what you need to know and why the low-yield utility might be the better choice for you.

What are Black Hills and Dominion doing?

Both Black Hills and Dominion are primarily regulated utilities. That means they are granted monopolies in the regions they serve, but must get their rates and investment plans approved by the government. This usually leads to a slow and steady expansion of the business over time. None of these companies should be considered growth investments.

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Black Hills is the smaller of the two, with a market cap of about $4 billion. Dominion is one of the largest utilities in the United States, with a market capitalization an order of magnitude larger (about $47 billion). As you might expect, Black Hills’ customer base is also much smaller, at about 1.3 million customers in parts of eight states. Dominion serves 4.5 million customers in parts of 13 states.

There is another subtle difference that is vitally important. Black Hills operates on both electricity and natural gas. Dominion has historically done both, but has decided to downsize its business so that electricity is the main driver of its operations. The structure of the business doesn’t matter as much as the fact that Dominion has virtually frozen its dividend while it moves its business to electric power. Right now, the focus is on strengthening the balance sheet and lowering the dividend payout ratio.

D Dividends per share (quarterly) data by YCharts

Black Hills is a dividend king

The importance of this becomes clearer when you learn that Black Hills has increased its dividend for more than five decades, making it a Dividend King. Meanwhile, Dominion cut its dividend a few years ago when it sold its midstream pipeline business, an earlier step toward becoming a pure electric utility. If you’re interested in reliably collecting a dividend check, Black Hills wins hands down.

However, Black Hills’ dividend yield is 4.3%, while Dominion Energy’s yield is 4.7%. The higher yield could tempt yield-hungry investors. And while dividend increases are on hold at Dominion right now, it will likely start raising the dividend again along with earnings growth in a few years once the payout ratio approaches industry averages, but there is no no specific goal. The company expects earnings to expand 5% to 7% annually through 2029. Of course, management also said that increasing the dividend was a primary focus after the dividend cut, and that it didn’t play out exactly as planned because the increase dividends is now discontinued.

Black Hills, meanwhile, has averaged dividend growth over the past decade of about 5%, while projecting earnings growth of 4% to 6%. That’s not far from what you might expect from Dominion when the dividend is likely to start growing again. If you choose Dominion, you’ll have to give up a few years of Black Hills dividend growth, but your compensation will be the higher starting yield. This will probably make the issue somewhat similar at the end of the day on the revenue front. But the real question is about the business behind the return, and that’s where Black Hills appears to be more focused on the well-being of its shareholders.

What is the best high yield option?

Given the ongoing changes at Dominion, which have included a dividend cut, failure to meet management’s dividend projection following the cut, and now a dividend break that will not end until the payout ratio is again in line with peers, Dominion is something of a flip stock. The risk is not that great, but management needs to prove that it can be trusted. It’s probably best suited for more aggressive investors, at least until the dividend starts growing again.

Black Hills, meanwhile, is the kind of boring, high-yield utility stock that even the most conservative investor could love. Although it is a small company, it has clearly proven that it can pay investors well in good times and bad. The loss of a small yield compared to Dominion will likely be a net gain when you consider the underlying businesses.