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Berko: Broker’s advice on Dominion, I bonds rock solid

By Malcolm Berko

Published: February 19, 2017, 6:01am

Dear Mr. Berko: We wanted to buy 200 shares of MGE Energy, but our new stockbroker recommended that we buy 200 shares of Dominion Energy instead. Please give us your opinion. He also recommended that we invest $30,000 in U.S. government I bonds. Please give us your advice here, too.

— T.W., Oklahoma City

Dear T.W.: I like that broker. He’s among the few remaining brokers who still recommend common stocks rather than all that proprietary junk. He has good smarts and is giving you good advice. MGE Energy yields 1.94 percent and can’t hold a candle to Dominion Energy (D-$73.15), which is a classy dividend-growth utility.

D is so highly regarded that The Vanguard Group owns 41 million shares, Wellington Management owns 30.2 million and Capital World Investors owns 25 million. Meanwhile, State Street, Bank of America, Franklin Resources, BlackRock and Northern Trust together own 84 million shares. This is a supercalifragilistic electric and gas utility with 675 million shares outstanding and an expialidocious dividend record. Take your broker’s advice and buy 200 shares of D, which yields 4.12 percent.

Dominion Energy is headquartered in Richmond, Va., and has $11.5 billion in revenues. D serves 2.6 million electric customers in Virginia and North Carolina, plus it has 2.3 million gas customers in Ohio, West Virginia and Utah. Last year, Dominion paid $4.4 billion for Questar, a natural gas utility with 1.1 million Utah customers. And in April, Dominion will sell Questar’s gas pipeline for $1.7 billion to its 71 percent-owned Dominion Midstream Partners (DM-$32.85), an operation that produces gas for all of D’s natural gas customers.

D is a magnificently managed utility that has modernized its plant and equipment into an efficient profit-making machine and is now generating attractive growth from investments in new energy sources. Management is building a 1,588-megawatt gas-fired facility, which will be operational in 2018, and plans to add 220 megawatts of solar capacity in Virginia and North Carolina. And D now has 1 trillion cubic feet of underground natural gas storage capacity. With a 15 percent return on shareholder equity and net profit margins between 17 and 20 percent, it’s little wonder that Dominion has raised its dividend for 14 consecutive years. And many on Wall Street believe that Dominion will have excellent earnings and dividend growth. Utility stocks are popular among investors because of their relative safety and high dividend yields but are not known for their high dividend growth. However, D is a rare mix of all three. Dominion is a low-volatility stock, with a beta of 0.25. The 4.12 percent dividend yield is double the Standard & Poor’s 500 average, while management’s announced goal is to increase the dividend by 8 percent a year. And Dominion-watchers believe that during the next four to six years, earnings could grow by 5 to 7 percent annually. So total returns could tally 9 to 11 percent per year.

I also like your broker’s advice to invest in I bonds as a hedge against possibly higher inflation. They currently yield 2.76 percent but change every six months with the rate of inflation. The 2.76 percent yield is good through April, at which time it will adjust. The interest accrues tax-deferred until you redeem the bonds, but if you redeem the bonds in less than five years, you will pay a penalty of three months’ interest. (Big deal.) You’re limited to $10,000 face value annually, but a married couple can buy $10,000 worth of the bonds in the husband’s name, $10,000 worth in the wife’s name and $10,000 worth jointly, for a total of $30,000 a year. Go to www.treasurydirect.gov, which will tell you all you need to know about I bonds and how you can purchase them electronically. The minimum purchase is $25, and adults can buy I bonds for minor children and hold them in minor-linked accounts. They make swell birthday or holiday gifts for minors.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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