Is Duke Energy Stock a Buy? | The Motley Fool (2024)

Duke Energy (DUK 1.35%) is not an exciting company and probably never will be. But that's actually a good thing in many ways if you are looking to live off of the dividends your portfolio generates. Indeed, in today's low-yield world, this giant U.S. utility could be a good fit for investors seeking to generate as much income as they can.

A look at the yield

Duke Energy's dividend yield is currently around 3.9%. That compares extremely favorably to the tiny 1.4% investors can get from an S&P 500 Index fund and even to the 3.1% on offer from the average utility, using Vanguard Utilities Index ETF as a proxy. Historically speaking, Duke's yield is toward the low end of its historical range, so it would be hard to suggest that it is cheap today. However, given the market environment, investors looking to put money to work right now will find the yield, relative to other options, fairly attractive.

Duke has a long history of rewarding investors with dividend increases, as well. For the past 16 years it has increased the payment annually. The average annualized increase over the past decade was roughly 3%, which is in line with the historical growth rate of inflation. That means that the buying power of the dividend has been maintained over time. So it has some pretty solid bonafides on the dividend front. That said, the payout ratio has historically trended toward the high side of its peer group. That's not a terrible thing, but really conservative investors might consider passing because of this factor. Most, however, will probably just want to monitor the issue.

This isn't a stock that you would want to bet your retirement on, but as a part of a diversified portfolio it could make a lot of sense today. A key piece of that is its business model, which is almost entirely tied to regulated utility assets.

Boring to the core

Duke serves 7.8 million electric customers across six states. Its natural gas utility operations provide fuel to 1.6 million customers in five states. And it has a small long-term contract-based merchant power business in the renewable energy space that spans 19 states. The vast majority of its operations are regulated by the government, meaning the company gets a monopoly but it has to ask for permission if it wants to increase customer rates.

There's two important dynamics here. First, slow and steady is basically all you can ever expect because regulators won't allow outsize profits. However, Duke Energy's growth is not tied to market gyrations; it is driven by what regulators approve. That, in turn, is based on Duke maintaining the reliability and integrity of its systems.

DUK data by YCharts

Right now the company has plans to spend $59 billion between 2021 and 2025, which it expects to drive earnings growth of between 5% and 7%. There's general maintenance in that figure, but a fairly large chunk of the total is tied to the company's shift toward clean energy and ensuring system integrity. Those are both highly regarded by regulators. Even if Wall Street were to fall into a bear market, Duke's spending and growth plans will likely keep moving forward.

That said, Duke's business is capital intensive, so leverage here is fairly high. Its debt to equity ratio, however, isn't particularly out of line with similarly sized peers. But investors do need to keep leverage in mind, since Duke's ability to support its capital spending plans will require frequent trips to the capital markets. The low interest rates today are a net benefit, but if rates start to rise its financing costs would inch higher, as well, potentially crimping the company's earnings growth projections.

It's just OK

All in, Duke Energy is far from a screaming buy at current prices. However, if you are trying to generate dividend income in today's low-yield world, it is still worth looking at. You just have to go in knowing that you are paying full fare for a slow and boring dividend payer. That's not a terrible deal, but it's not a great one, either.