These Dividend Stocks Pay Reliable Retirement Income
If you want to earn more retirement income from your portfolio, then you need to consider this tiny stock market niche.
Longtime readers know I’m a big fan of small-cap dividend stocks. I often describe this group as the “minor leagues” of the investing world, a proving ground for top prospects that could represent the next crop of corporate all-stars. And because these stocks trade at lower valuations than their big-cap cousins, they often generate better returns over time.
Case in point: Chesapeake Utilities Corporation (NYSE:CPK). This company owns a collection of energy businesses across Florida and the Northeast, including electric transmission, propane distribution, and natural gas pipelines. These operations serve as the “toll roads” of the utility industry. Chesapeake earns steady fees on each cubic foot of gas or megawatt of power that passes through its network.
It’s a great business. Even during a downturn, people still need to heat their homes, turn on their lights, and keep their T.V. sets aglow. Moreover, government agencies don’t often approve the construction of new pipelines and electric transmission towers. That leaves Chesapeake Utilities with a near-monopoly over the markets it serves.
This has created a great retirement income stream for investors. Management has mailed out dividend checks to shareholders for 58 consecutive years. Those payments have almost doubled over the past decade, raising the yield on shares to almost two percent. (Source: “A Strong Foundation for Growth: Philadelphia Securities Association,” Chesapeake Utilities Corporation, June 5, 2019.)
Yet despite this great performance, Wall Street has barely taken notice. Only five analysts cover Chesapeake. By comparison, more popular dividend stocks like McDonald’s Corp (NYSE:MCD), Johnson & Johnson (NYSE:NJ), and The Coca-Cola Co (NYSE:KO) often receive coverage from dozens of research outfits. (Source: “Chesapeake Utilities Corporation (CPK),” Yahoo! Finance, July 5, 2019.)
Counterintuitively, this lack of coverage actually presents an opportunity. Low investor interest keeps the stock’s valuation low. A low valuation leads to higher dividend yields. And higher dividend yields, added up over time, compound to massive returns.
You can see the impact of this phenomenon in the Chesapeake Utilities stock chart below. Over the past decade, CPK stock has generated a total return, including dividends, of almost 700%. That crushed the gain for the broader S&P 500 during the same period.
Chart courtesy of StockCharts.com
Don’t expect the growth for Chesapeake Utilities stock to slow down any time soon. Given its market cap of only $1.6 billion, Chesapeake is only a fraction of the size of most established utilities.
This allows management to increase profits from a much smaller base. Chesapeake executives project that earnings per share will grow at a high single-digit clip over the next five years, driven by almost $1.0 billion in secured expansion projects. (Source: Source: “A Strong Foundation for Growth: Philadelphia Securities Association,” Chesapeake Utilities Corporation, op. cit.)
I don’t foresee this stock remaining an undiscovered gem for long, though. Investment bank Maxim Group initiated coverage on Chesapeake last year, begging their clients to start buying shares. Several hedge fund managers, including Jim Simons, Cliff Asness, and Israel Englander, have also started building huge positions. (Source: “Chesapeake Utilities Corp (CPK) – Hedge Fund Holdings,” Insider Monkey, last accessed July 5, 2019.)
This is likely just the beginning. I expect small-cap dividend stocks like Chesapeake Utilities Corporation to draw more interest from investors as people seek out safe retirement income.
If you skip over this name now, I suspect you’ll be kicking yourself in 10 years.