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Should you buy AGL shares for the dividend income?

On the surface, AGL Energy Limited (ASX: AGL) looks like a dream stock to own for ASX dividend income.

AGL shares today offer a whopping starting dividend yield of 5.81% – based on last year’s payout of $1.19 cents per share.

That’s more than what dividend-king Commonwealth Bank of Australia (ASX: CBA) is offering at the current time (5.24%).

AGL’s dividends usually come 80% franked as well, which means the company’s yield grosses up to 7.81% if you include the value of these franking credits. That’s almost 4 times what you could expect from a market-leading term deposit of 2% these days

AGL also benefits from being in an extremely defensive industry as well. We all need electricity and gas after all (they’re utilities, not optional services) – and that isn’t going to change despite what state the economy is in.

So we might as well pack our bags and go home – we’ve found the perfect income stock, hallelujah!

Well, not so fast

Although AGL looks like a phenomenal stock to own for dividend income on paper, there’s a couple of things that concern me about owning this kind of company.

The first is the level of government interference in this kind of market.

Although many states have privatised their electricity generation and transmission services/assets, not all have. Since Australia is now powered by a national grid, this kind of public/private arrangement can lead to misallocation of capital, inefficient communication and competing priorities that might not exist under either a monopoly provider or a field of perfect private competition

I don’t have a problem with either private or public ownership here, I’m just pointing out that the 2 often don’t work well together.

Another consideration is electricity prices. As we probably all know, prices have been rising steeply over the past decade. When this kind of thing becomes a political issue, you will often see headlines like ‘Electricity companies make billions on rising prices while families do it tough’.

When it’s politically popular for you as a shareholder to make less money, it’s a problem in my book.

If governments were faced with enough pressure on this kind of issue, its very possible that regulations would be introduced mandating lower power and gas prices. If that occurred, it would likely mean lower  share prices and maybe even reduced dividend payments.

Foolish takeaway

Long story short, a company like AGL has to face more political and regulatory risk than most companies and this reduces its appeal as an investment, from my point of view. If you’re happy to take those risks, then AGL’s 5.81% dividend might be worth it. But it might serve you well to prepare for unconventional things in this kind of industry!

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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