Competitive advantage makes Duke Energy a smart buy
Shares of Duke Energy (NYSE: DUK) have been performing well lately, rising more than 20 percent over the past year. It helps that it produces something we use regardless of economic conditions: electricity.
Admittedly, Duke doesn’t bring exciting growth to the table, but its portfolio of power generation is basically unsurpassed. In addition to taking advantage of low-cost natural gas prices, which are making electricity cheaper and boosting profit margins, Duke has been a leader in moving its production toward renewable energy fuel sources. Duke recently had 1,630 megawatts’ (MW) worth of wind energy production, 11 solar farms and 3,200 MW of hydroelectric power, making it the second-largest renewables producer in the United States. It’s even begun dabbling in biofuel electrical generation.
Duke also enjoys a competitive advantage in the form of a barrier to entry in the utility business that keeps its dominance intact. With few competitors having the cash to take on Duke, it can instead focus less on marketing its business and more on researching ways to make electrical generation more efficient.
The stock may not be a screaming bargain at recent levels, but it does offer patient shareholders a dividend yield that was recently a hefty 4.6 percent. Duke has been upping that payout by an annual average of nearly 19 percent over the past five years.
Ask the Fool
Q: What makes stock prices go up and down from one day to the next? – D.M., Glendale, Calif.
A: Over the long run, a stock’s changing price should reflect the changing value of the company. As the company grows and sells more widgets, it’s worth more – and vice versa.
But over the short term, lots of serious or silly things can move a stock, such as: strong or weak earnings reports, changes in management, new products or services, big contracts landed or lost, famous investors buying or selling shares, media coverage, analysts upgrading or downgrading the stock, the overall stock market rising or falling, other stocks in the same industry rising or falling, heightened fear or greed among investors, good or bad news regarding a competitor, lawsuits filed or won or lost, the prospect of legislation affecting the company’s future, changes in supply or demand for the company’s offerings, global expansion or retrenchment, people expecting big things because the industry is “hot,” or rumors that the company might buy or be bought by another company.
Ignore short-term moves. Focus instead on your company’s health and long-term growth prospects.
Q: Are capital-gains taxes the same regardless of my income, or can I decrease them by realizing gains in a year when my income is less than normal? – K.L., Tampa, Fla.
A: For most of us, for now, the tax will be the same: 15 percent for long-term gains, unless your income is so low that you’re in the 15- or 10-percent tax bracket (in which case it might be zero). Short-term gains are taxed at your ordinary income tax rate. If you have capital losses, you can offset your gains with them. Learn more at fool.com/taxes.
My dumbest investment
In the mid-2000s I chased yields, investing about $17,000 in the Impac Mortgage Holdings real estate investment trust (REIT). It was involved in “liar loans” – mortgages requiring no income or asset documentation – among other things. I compounded my stupidity by making the position a huge percentage of my portfolio. I had my personal financial meltdown in 2007. I salvaged about $450 from the investment and bought stock in Heinz at around $37 per share (now it’s $55). My loss was the price of an education. – Tom B., Phoenix
The Fool responds: It’s too late for you, but Impac recently announced it would no longer offer liar loans. The stock took shareholders on a wild ride, reaching a split-adjusted level of more than $190 per share back in 2004, and recently trading for close to $2 per share. Lax lending standards before the mortgage bubble burst caused many investors to lose money – especially those, like you, who had too many eggs in the financial services basket.
Heinz yields more than 3 percent, and has averaged 9 percent growth annually over the past 20 years.