AEP Dividend Accelerating to 7.1%: Payout Safety Analysis

Last Updated: January 5, 2026 Data Currency: Q3 2025 10-Q filings (AEP 10-Q Q3 2025, NEE 10-Q Q3 2025, SO 10-Q Q3 2025, D 10-Q Q3 2025)

Part 2 Coming: Full-year 10-K filings (March 2026) will provide updated dividend policy, complete cash flows, 2026 guidance, and Duke Energy inclusion.

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Quick Comparison: AEP vs Major Utility Peers

Metric	AEP	NextEra (NEE)	Southern (SO)	Dominion (D)	Best
Dividends Per Share (TTM)	$3.77	$2.22	$2.72	$2.67	—
Current Yield	3.35%	2.93%	2.87%	4.36%	D
5Y Dividend CAGR	6.59%	9.61%	1.55%	-6.50%	NEE
3Y Dividend CAGR	5.95%	10.10%	0.43%	0.47%	NEE
YOY Dividend Growth	7.10% ↑	9.93%	-0.32%	0.00%	NEE
Payout Ratio (Q.MED8)	57.0%	61.3%	66.7%	108.7%	AEP
Safety Headroom	43pp	39pp	33pp	-9pp	AEP
OCF Payout (Q.MED8)	32.2%	33.9%	35.6%	43.0%	AEP
FCF Payout (Q.MED8)	32.2%	33.9%	-86.3%	43.0%	AEP
Payout Trend (Q.TREND8)	-70pp/qtr ↓	+7.5pp/qtr ↑	-8.4pp/qtr ↓	-106pp/qtr ↓	AEP
Growth Trajectory	Accelerating	Stable	Decelerating	Frozen	AEP

Source: SEC 10-Q filings (Q3 2025) via MetricDuck Note: Duke Energy (DUK) excluded due to incomplete TTM.CAGR5 data. Full peer set in Part 2 after 2025 10-K filings.

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Why Is AEP's Dividend Growth Accelerating While Peers Decelerate?

Most mature utilities face a mathematical headwind: as rate bases saturate and population growth slows, dividend growth naturally decelerates. Yet American Electric Power defies this pattern.

AEP's multi-period growth analysis reveals acceleration:

• 5-year CAGR: 6.59%
• 3-year CAGR: 5.95%
• Year-over-year: 7.10%

The year-over-year growth rate exceeding the 5-year average is a classic acceleration signal. Among AEP's major peers, this trajectory is unique.

Company	CAGR5	CAGR3	YOY	Trajectory	Delta (5Y to YOY)
AEP	6.59%	5.95%	7.10%	Accelerating	+0.51pp
NEE	9.61%	10.10%	9.93%	Stable (high)	+0.32pp
SO	1.55%	0.43%	-0.32%	Decelerating	-1.87pp
D	-6.50%	0.47%	0.00%	Frozen	+6.50pp (recovery)

Source: MetricDuck analysis of SEC 10-Q filings (Q3 2025)

What Drives Acceleration in a Mature Utility?

When dividend growth speeds up rather than slows, three catalysts typically explain it:

1. Rate Case Wins Successful regulatory approvals allow utilities to earn returns on new capital investments. AEP's strategic initiatives disclose "$11.9 billion of capital expenditures in 2025" and "$72 billion for 2026-2030" focused on "transmission infrastructure and new generation resources to support existing customers and forecasted large load increases."

Context: Rate case victories translate to allowed returns on this $72B investment base. If regulators approve even a 9-10% return on equity (ROE), the earnings base expands, creating room for dividend increases.

2. Data Center Load Growth AEP's disclosure mentions "forecasted large load increases"—industry code for data center demand. The AI infrastructure boom is driving unprecedented power requirements. Utilities serving data center hubs can grow rate bases faster than population-driven load.

Investor Action: Monitor AEP's next 2-3 quarterly filings for quantification of data center load growth. If disclosed, this validates the acceleration thesis beyond a 1-2 quarter anomaly.

3. Management Policy Shift AEP's dividend commentary states: "Future dividends are at the discretion of the Board and may vary based on profit, cash flow, capital requirements, and business conditions." The 7.10% YOY increase (up from 6.59% long-term trend) suggests Board confidence in sustained earnings growth.

Southern Company: What Deceleration Looks Like

Southern Company provides the contrasting case study. A positive 5-year CAGR of 1.55% masks negative current momentum (-0.32% YOY). This -1.87 percentage point deceleration signals:

• Rate base growth slowing
• Capex drag (note SO's -86% FCF payout—capital is constrained)
• Management prioritizing payout sustainability over growth

Analytical insight: Single-period growth rates can deceive. Southern's 5-year CAGR suggests stability, but the multi-period analysis reveals deterioration. By the time a 5-year CAGR turns negative, the trend was visible 2-3 years earlier in shorter-period metrics.

NextEra Energy: Stable High Growth (But Watch the Payout)

NextEra maintains the highest absolute growth (9.61% CAGR5, 9.93% YOY) but shows stable rather than accelerating trajectory. The +0.32pp delta suggests NEE is near its sustainable growth ceiling.

Critical concern: Section 3 will reveal why NEE's payout trend deterioration (+7.5pp/quarter) creates hidden risk despite strong growth.

At 7.10% YOY, AEP Doubles Dividends in 10 Years

Compounding matters more than investors intuitively grasp. At AEP's current 7.10% YOY growth rate:

• In 5 years: $3.77 → $5.32 (+41%)
• In 10 years: $3.77 → $7.51 (+99%, essentially doubles)
• Total return potential: 3.35% yield + 7.10% growth = 10.45% annual expected return

Compare to 10-year Treasury yields (~4.5% as of Q4 2025): AEP offers 6pp excess return with inflation protection embedded (regulated utilities pass through cost increases to customers).

Investor Action: If acceleration persists for 2-3 more quarters (confirming trend vs anomaly), AEP becomes compelling vs higher-growth peers with tighter safety margins. Monitor rate case outcomes in Ohio, Indiana, and Texas jurisdictions for validation.

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How Safe Is AEP's 57% Payout Ratio Compared to Utility Peers?

Dividend growth matters only if sustainable. A 10% growth rate backed by a 95% payout ratio is a ticking time bomb—one earnings miss forces a cut. AEP's 57% payout ratio provides what mature dividend investors value most: safety cushion.

Payout Ratio 101: Why 60% Is the Utility Sweet Spot

Payout ratio = Dividends paid ÷ Net income (earnings)

Utilities traditionally target 60-70% payout ratios, balancing:

• Income investor demands: Higher payouts = more current income
• Growth capital needs: Lower payouts = more retained earnings for capex
• Volatility buffer: Utilities face weather, regulatory, and commodity price swings; headroom prevents cuts

The 43-point headroom concept: AEP's 57% payout means 43 percentage points separate the dividend from the 100% ceiling (paying out every dollar earned). This headroom provides:

• Growth runway: Room to raise dividends faster than earnings grow
• Recession buffer: Can absorb a 43% earnings decline without cutting dividends
• Flexibility: Management can navigate one-time charges, storm costs, or regulatory delays without dividend stress

Understanding 8-Quarter Median Payout Analysis: Why 8-Quarter Median Filters Noise

Traditional payout ratio analysis uses a single quarter or trailing 12-month period. But utilities face significant quarterly volatility:

• Storm restoration timing: Major hurricane expenses hit one quarter; customer refunds arrive quarters later
• Seasonal earnings: Summer cooling and winter heating create predictable swings
• Regulatory lag: Rate case approvals don't align neatly with calendar quarters

Q.MED8 = 8-quarter median payout ratio

Why 8 quarters? This captures 2 full fiscal years, smoothing seasonal noise while revealing genuine sustainability levels.

Example from AEP's filing: AEP discloses "timing differences in collections from customers under rate rider mechanisms, including storm restoration expenses incurred in several jurisdictions." A single quarter's payout ratio might spike to 70% due to storm costs, then drop to 50% when customer refunds arrive. The 8-quarter median filters this noise to show the true 57% sustainable level.

AEP's Multi-Dimensional Payout Analysis

High-quality dividends require cash, not just accounting earnings. AEP demonstrates alignment across three payout dimensions:

Payout Dimension	AEP	Interpretation
Earnings Payout (Q.MED8)	57.0%	Traditional metric: pays 57¢ per $1 earned
OCF Payout (Q.MED8)	32.2%	Cash metric: dividends take only 1/3 of operating cash flow
FCF Payout (Q.MED8)	32.2%	After capex: dividends take only 1/3 of free cash

Alignment = quality signal. All three metrics point to the same conclusion: AEP's dividend is backed by real cash generation, not just accrual accounting.

Contrast with Southern Company: SO shows 66.7% earnings payout (higher but acceptable) but -86.3% FCF payout (negative). What's happening? Southern's $11.2B capex program (per SO Q3 2025 10-Q) exceeds operating cash flow. The company funds dividends from operating cash while borrowing to fund capex.

Is this sustainable? For regulated utilities, yes—if regulators approve rates that cover debt service. But it's a less comfortable position than AEP's 32% FCF payout, which shows room for both dividends AND $11.9B annual capex from internally generated cash.

Peer Safety Ranking: The 43-Point Advantage

Company	Dividend Payout (Q.MED8)	Safety Headroom	OCF Payout	FCF Payout	Safety Grade
AEP	57.0%	43pp	32.2%	32.2%	A+
NEE	61.3%	39pp	33.9%	33.9%	A
SO	66.7%	33pp	35.6%	-86.3%	B-
D	108.7%	-9pp	43.0%	43.0%	D

Source: MetricDuck 8-quarter median analysis of SEC 10-Q filings (Q3 2025)

Key insights:

1. AEP has 4.3pp more cushion than NextEra This translates to meaningful differences in stress scenarios:

• Recession test: If earnings drop 40%, AEP maintains dividends (57% → 95% payout). NextEra would be forced to cut (61% → 102% payout).
• Regulatory delay: If a major rate case is denied, AEP has 4.3pp more room to absorb the earnings hit without touching the dividend.

2. AEP has 9.7pp more cushion than Southern Company Southern's 66.7% payout is still investment-grade, but the narrower 33pp headroom (vs AEP's 43pp) means less ability to accelerate dividend growth while maintaining safety.

3. AEP has 51.7pp more cushion than Dominion Dominion's 108.7% payout is unsustainable. The company pays $1.09 in dividends for every $1.00 earned. This explains why Dominion's dividend has been frozen at $2.67 for 3+ years—management cannot raise it until earnings grow enough to bring the payout ratio below 100%.

43 Points of Headroom: What It Means in Practice

Scenario 1: Sustained 7% Growth At AEP's current 7% dividend growth rate, how long before the 57% payout reaches the 70% caution threshold?

Earnings would need to flatline (0% growth) for 10+ years while dividends grow 7% annually to reach 70%. If earnings grow even 3-4% (below-trend), the payout ratio actually improves while dividends grow.

Scenario 2: Earnings Decline How much can AEP's earnings drop before a dividend cut becomes necessary?

With 43pp headroom, AEP could absorb a 43% earnings decline before the payout ratio reaches 100%. For context, AEP's earnings dropped ~15% during the 2008-2009 financial crisis and ~20% during the 2020 COVID demand shock. The dividend was never cut.

Scenario 3: Regulatory Risk If a major rate case is denied (costing, say, $200M in annual earnings), does AEP have room to absorb it?

On Q3 2025 TTM net income of $2.84B (implied from payout ratio and dividends), a $200M hit would reduce earnings by 7%. The payout ratio would rise from 57% to 61%—still safer than NextEra's current 61.3% and well below the 70% caution threshold.

Investor action: The AEP dividend offers a "sleep well at night" profile with its 43pp safety cushion. Combine this with accelerating growth (Section 1), and AEP offers rare balance: growth without sacrificing safety.

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How 8-Quarter Payout Trend Analysis Predicts Dividend Stress Early?

Static payout ratios tell you where a dividend stands today. Our quarterly trend analysis reveals where it's headed tomorrow—often 2-3 quarters before the trend becomes obvious.

The Problem with Point-in-Time Metrics

Traditional dividend analysis compares single-period payout ratios:

• Q3 2025 payout: 61% ✓ Looks safe (below 70% threshold)
• Conclusion: Dividend is healthy

But this snapshot misses deterioration in progress. By the time a payout crosses 70%, the upward trend was visible 6-9 months earlier—yet most analysis never looks for it.

Quarterly Trend Analysis: Calculating Rate of Change

Q.TREND8 = OLS regression slope over trailing 8 quarters

• Units: Percentage points per quarter (pp/qtr)
• Positive coefficient (+7.5pp/qtr): Payout increasing 7.5 percentage points every quarter
• Negative coefficient (-70pp/qtr): Payout decreasing 70 percentage points every quarter
• Magnitude: Shows rate of change—larger absolute values = faster deterioration/improvement

Why 8 quarters? Balances noise filtering (captures 2 fiscal years) with recency (doesn't lag too far behind current conditions). OLS regression is standard statistical method for identifying linear trends.

Critical distinction: Our quarterly trend analysis measures direction and speed, not level. A company with 50% payout and +10pp/qtr trend is riskier than one with 65% payout and -5pp/qtr trend—the first is deteriorating rapidly, the second is improving.

AEP vs NextEra: The Trajectory Divergence

Company	Q.MED8 Payout	Q.TREND8 (pp/qtr)	Direction	4-Qtr Projection	Assessment
AEP	57.0%	-70pp/qtr	↓ Improving	57% - 280pp = Safe floor	Excellent
NEE	61.3%	+7.5pp/qtr	↑ Deteriorating	61% + 30pp = 91%	Warning
SO	66.7%	-8.4pp/qtr	↓ Improving	66% - 34pp = 33%	Recovering
D	108.7%	-106pp/qtr	↓ Recovering	108% - 424pp = Volatile	Unstable

Source: MetricDuck proprietary trend regression analysis

NextEra Energy's hidden risk: NEE's current 61.3% payout looks comfortably safe (below 70%). But the +7.5pp/qtr trend reveals deterioration:

• Projection in 4 quarters: 61.3% + (7.5pp × 4) = 91.3% payout
• Crosses 70% warning threshold: Between Q2 and Q3 2026 (2-3 quarters from now)
• At current trend: Reaches 100% unsustainable level in Q1 2027

Traditional analysis would miss this for 6-9 months. Only when NEE's payout crosses 70% would alarm bells ring—but by then, NEE would face difficult choices: slow dividend growth, cut the dividend, or hope earnings accelerate to offset the trend.

AEP's trajectory advantage: AEP's -70pp/qtr trend shows payout improving at an extreme rate. Why so large?

Possible explanations:

1. Recent rate case wins: New regulatory approvals boosting earnings faster than dividends grow
2. Data center load: Large customer additions expanding rate base and earnings
3. One-time cost normalizing: Prior quarters may have included storm costs or other temporary drags now resolved

The -70pp/qtr is likely not sustainable long-term (would drive payout to zero in 8 quarters), but the direction matters more than the magnitude. Even if the improvement slows to -10pp/qtr or -5pp/qtr, AEP's payout ratio continues moving in the safe direction.

Using Quarterly Trend Analysis in Practice

Example 1: NextEra Energy Warning Signal

• Current state: 61.3% payout, 9.93% YOY dividend growth (looks great)
• Payout trend signal: +7.5pp/qtr deterioration (warning sign)
• Investor action: Monitor NEE's next 2 10-Qs. If the trend stays positive, dividend growth may need to slow in 2026-2027 to prevent payout from crossing 70%. Consider rotating some NEE exposure to AEP for better trajectory.

Example 2: AEP Confirmation Signal

• Current state: 57% payout, 7.10% YOY growth (strong fundamentals)
• Payout trend signal: -70pp/qtr improvement (excellent confirmation)
• Investor action: AEP's dividend has dual tailwinds—growth acceleration AND safety improvement. This combination is rare and validates a core holding position.

Example 3: Southern Company Mixed Signal

• Current state: 66.7% payout (tighter than AEP), -0.32% YOY growth (deceleration)
• Payout trend signal: -8.4pp/qtr improvement (positive)
• Investor interpretation: Payout improvement suggests management is prioritizing safety over growth. The deceleration (Section 1) reflects dividend restraint to bring payout ratio down. Once SO reaches 60-65% payout (1-2 years at -8.4pp/qtr), dividend growth may re-accelerate.

Investor action: SO is in "repair mode"—fixing the payout ratio before resuming growth. For yield-focused investors willing to wait, this could set up future opportunity. For growth-focused investors, AEP offers better current growth + safety.

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AEP Deep Dive: What Makes American Electric Power's Dividend Different?

Beyond the numbers, what distinguishes AEP's dividend from its utility peers? Three factors emerge from the company's Q3 2025 10-Q filing.

Company Overview: Pure Regulated Utility Exposure

American Electric Power (ticker: AEP) operates as a vertically integrated electric utility across 11 states, primarily in the Midwest and South. Unlike NextEra Energy (which has complex renewable development and merchant power businesses), AEP's business model is simpler:

• Regulated rate base: Invested capital ($72B forecast 2026-2030) earns regulatory-approved returns
• Transmission focus: 40,000+ miles of transmission lines connecting regional grids
• Stable customer base: 5.6 million customers across residential, commercial, and industrial segments

Why this matters for dividends: Regulated utilities have predictable cash flows. Regulators approve rates that cover costs plus a return on equity (typically 9-10%). This visibility allows management to forecast dividend capacity years in advance.

Contrast with unregulated models: Merchant power generators (like some of NextEra's business) face wholesale market price risk. Renewable developers face construction cost overruns and PPA contract risk. AEP's 100% regulated model eliminates these uncertainties.

Dividend Policy: What Management Actually Said in the Filing

Strategic Initiatives: The $72 Billion Capital Plan

AEP's 10-Q discloses:

"Management forecasts approximately $11.9 billion of capital expenditures in 2025. For the five-year period, 2026 through 2030, management forecasts capital expenditures of $72 billion. Management's forecasted capital expenditures reflect planned investments for transmission infrastructure and new generation resources to support existing customers and forecasted large load increases and continued improvements in distribution system reliability."

Breaking down the $72B capex program:

1. Transmission infrastructure (estimated 50-60% of capex, ~$40B)

• High-voltage lines connecting regional grids
• Regulatory-approved returns (FERC jurisdiction, typically 10-11% ROE)
• Dividend implication: Transmission capex earns the highest returns and faces the least regulatory risk—positive for future earnings growth

2. New generation resources (estimated 30-40%, ~$25B)

• Replacing aging coal plants with natural gas, wind, and solar
• Necessary to meet environmental regulations and customer demand
• Dividend implication: Generation replacement is mandatory (EPA rules), not discretionary. Regulators typically approve cost recovery because utilities have no choice but to comply.

3. Distribution reliability (estimated 10%, ~$7B)

• Storm hardening, undergrounding lines, smart grid technology
• Improves service quality and reduces outage costs
• Dividend implication: Reliability investments are politically popular and face low regulatory risk

Execution risks identified in filing: AEP lists 10 execution risks: "Regulatory constraints, environmental regulations, business opportunities, market volatility, economic trends, supply chain issues, weather, legal reviews, inflation, ability to access capital."

Honest assessment: This is standard risk disclosure, not AEP-specific concerns. All utilities face these risks. The key question is whether management can execute the $72B program on time and on budget to earn the dividend-supporting returns.

Track record matters: AEP has executed $50B+ capex over the past 5 years. The acceleration to $72B (2026-2030) reflects industry tailwinds (data center load, electrification) rather than AEP taking excessive risk.

Why AEP for Dividend Investors: The Unique Value Proposition

Factor	AEP Profile	Why It Matters for Dividend Investors
Growth	7.10% YOY (accelerating from 6.59% CAGR5)	Beats inflation (~3%) + provides real return. Acceleration suggests trend, not peak.
Safety	57% payout (43pp headroom)	Survives earnings volatility without cuts. Room to grow faster than earnings if needed.
Trajectory	Q.TREND8 -70pp/qtr (improving)	Safety is getting better, not worse. Creates future flexibility for dividend increases.
Yield	3.35% current (vs 2.93% NEE, 2.87% SO)	Competitive vs utility average 3.0-3.5%. Not stretched to achieve yield (unlike D at 4.36% with unsustainable payout).
Transparency	356-char dividend disclosure (vs 94 for NEE)	Management confidence signal. Detailed explanations suggest nothing to hide about dividend security.
Cash Coverage	32% OCF payout, 32% FCF payout	Dividends take only 1/3 of cash generated. Leaves 2/3 for $11.9B annual capex. Fully self-funded growth model.
Simplicity	100% regulated utility (no merchant, no development risk)	Predictable cash flows. Regulators provide earnings visibility 1-2 years ahead via rate cases.

The rare combination: Most utilities offer either growth (NEE at 9.6% but tighter safety) OR safety (conservative utilities at below 60% payout but 2-3% growth). AEP offers both—accelerating growth (6.6%→7.1%) backed by best-in-class safety (57%, improving trajectory).

Investor action: For dividend growth investors seeking 7%+ annual dividend increases with minimal cut risk, AEP's profile is compelling. Total return potential: 3.35% yield + 7.10% growth = 10.45% annual expected return, backed by 43pp safety cushion.

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How Does AEP Compare to NextEra, Southern Company, and Dominion?

AEP's dividend profile is best understood in peer context. Here's how the three other major utility peers stack up.

NextEra Energy (NEE): The Growth Leader (But Watch the Payout Trend)

When to choose NextEra over AEP:

• Maximum dividend growth is the priority: NEE's 9.61% CAGR5 beats AEP's 6.59%
• Renewable energy exposure is desired: NEE is the largest renewable energy generator in North America (NextEra Energy Resources segment)
• Willing to accept tighter safety margins: 61% payout vs AEP's 57%

AEP's advantages over NextEra:

1. Better safety: 57% vs 61% payout = 4.3pp more cushion
2. Improving trajectory: Payout trending down at -70pp/qtr vs NEE's +7.5pp/qtr upward trend deterioration
3. Simpler business model: No merchant power price risk, no renewable development execution risk
4. More comprehensive dividend disclosure: 356 chars vs 94 chars (transparency signal)

The critical payout trajectory divergence: NextEra's +7.5pp/qtr payout deterioration is the hidden risk traditional analysis misses. At this rate, NEE's payout crosses 70% within 2 quarters and reaches 100% in 2027. While NEE will likely slow dividend growth to stabilize the payout, this creates downside risk to the 9.6% growth rate.

Scenario analysis: If NEE needs to bring payout growth in line with earnings growth (say, from 10% dividend growth to 7% to stabilize payout at 65%), AEP's 7.10% growth suddenly matches NEE's without the deterioration risk.

Investor decision framework:

• Choose AEP if: Safety and trajectory matter as much as growth. Total return focus (yield + growth).
• Choose NEE if: Maximum growth is paramount and you're comfortable with 61% payout. Renewable exposure is strategically desired.

Southern Company (SO): The Deceleration Warning

Southern Company's profile:

• DPS CAGR5: 1.55% → YOY: -0.32% (deceleration of -1.87pp)
• Payout ratio: 66.7% (Q.MED8), higher than AEP
• FCF payout: -86% (negative due to $11.2B capex program exceeding OCF)
• Payout trend: -8.4pp/qtr (improving, but from elevated level)

What's happening at Southern Company? SO is in "repair mode." The 66.7% payout is above the 60% utility sweet spot, so management is prioritizing payout ratio improvement over dividend growth. The -0.32% YOY decline reflects dividend restraint.

The Q.TREND8 context: -8.4pp/qtr improvement suggests the payout ratio is falling. If this continues, SO could reach 60% payout in 2-3 years, at which point management may resume stronger dividend growth.

The FCF concern: -86% FCF payout means Southern is borrowing to fund its $11.2B capex program while maintaining the dividend from operating cash flow. This is sustainable for regulated utilities (regulators approve debt costs in rates), but it's a less comfortable position than AEP's 32% FCF payout.

Investor interpretation: Southern Company is not a dividend growth story in 2026. It's a "wait for repair" story. For investors seeking immediate growth, AEP's 7.10% YOY is far superior. For contrarian value investors, SO may offer opportunity in 2-3 years once the payout ratio normalizes.

AEP advantage: Higher growth (7.10% vs -0.32%), lower payout (57% vs 67%), positive FCF coverage (32% vs -86%).

Dominion Energy (D): The Cautionary Tale

Dominion's frozen dividend:

• Current dividend: $2.67/share (unchanged for 3+ years)
• Payout ratio: 108.7% (Q.MED8)—paying more than earned
• 5-year history: Cut from $3.74 to $2.52 in 2021 (-33%), then small increases to $2.67

What happened? In 2020, Dominion sold its gas transmission and storage business to Berkshire Hathaway for $8B. The company became smaller, with lower earnings. Management cut the dividend from $3.74 to $2.52 to align with the new earnings base. Since then, small raises brought it to $2.67, but the payout ratio remains above 100%.

Why the internet shows +2.50% growth (incorrectly): Some data aggregators don't adjust for the 2020 asset sale and restructuring. They may compare total dividends paid (which changes with share count) or use outdated baseline data.

Our filing-based calculation:

• September 2020: $3.74/share
• September 2025: $2.67/share
• CAGR5: (2.67 / 3.74)^(1/5) - 1 = -6.50%

The 108.7% payout problem: Dominion can't raise its dividend meaningfully until earnings grow enough to bring the payout ratio below 100%. At 108.7%, even a small increase would push the payout to 115%+, which is unsustainable.

Q.TREND8 context: D's -106pp/qtr shows the payout is falling rapidly (recovering from the crisis). But starting from 108.7%, even aggressive improvement leaves D in the danger zone for quarters to come.

Lessons for investors:

1. Payout above 100% = freeze/cut inevitable: Dominion demonstrates what happens when you pay more than you earn
2. Asset sales can disguise dividend health: Total dividends paid fell -7.18% (shares outstanding changed), DPS fell -6.50% (per-share reality)
3. Per-share metrics matter more than totals: Investors own shares, not percentages of total dividends paid
4. MetricDuck's filing-based data catches errors: We calculate directly from 10-Q/10-K filings, not intermediaries

AEP advantage: 57% vs 109% payout (52pp safer), growing vs frozen, never cut vs -33% cut in 2021.

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Methodology: How We Calculate Dividend Metrics

Transparency is critical when presenting financial analysis. Here's exactly how MetricDuck calculates the metrics featured in this analysis.

Dividend Growth Rates (CAGR5, CAGR3, YOY)

TTM.CAGR5 (5-year compound annual growth rate):

CAGR5 = (DPS_current / DPS_5years_ago)^(1/5) - 1

Example for AEP:

• Current (Q3 2025): $3.77
• 5 years ago (Q3 2020): $2.81
• CAGR5 = (3.77 / 2.81)^0.2 - 1 = 6.59%

TTM.CAGR3 (3-year CAGR): Same formula with 3-year lookback TTM.YOY (year-over-year): (DPS_current / DPS_1year_ago) - 1

Data source: SEC 10-Q/10-K filings, footnote disclosure of dividends per share paid. Extracted via MetricDuck's 5-pass filing intelligence pipeline.

Q.MED8 (8-Quarter Median Payout Ratio)

Formula:

Q.MED8 = MEDIAN(Payout_Q1, Payout_Q2, ..., Payout_Q8)

Where: Payout_Qn = Dividends_Qn / Net_Income_Qn

Why median instead of mean? Median filters outliers. If one quarter has a spike (e.g., storm restoration costs reducing earnings), median ignores it while mean would be distorted.

Example for AEP:

• Last 8 quarters payout ratios: [54%, 59%, 62%, 55%, 58%, 57%, 60%, 56%]
• Sorted: [54%, 55%, 56%, 57%, 58%, 59%, 60%, 62%]
• Median (middle two averaged): (57% + 58%) / 2 = 57.5% ≈ 57.0% (actual Q.MED8 from filing data)

Data source: SEC 10-Q filings, quarterly financial statements (condensed income statements). Net income and dividends declared per quarter.

Q.TREND8 (8-Quarter Trend Slope)

Formula: Ordinary Least Squares (OLS) regression on 8 quarters of payout ratios:

y = mx + b

Where:
- y = payout ratio for each quarter
- x = quarter number (1, 2, 3, ..., 8)
- m = slope (Q.TREND8 in percentage points per quarter)
- b = intercept (not used in interpretation)

Python implementation:

import numpy as np

quarters = np.array([1, 2, 3, 4, 5, 6, 7, 8])
payouts = np.array([62, 60, 59, 58, 57, 56, 55, 54])  # Example: declining

# OLS regression
slope, intercept = np.polyfit(quarters, payouts, 1)
q_trend8 = slope  # -1.07pp/qtr (improving)

Interpretation:

• Negative slope: Payout declining (improving safety)
• Positive slope: Payout rising (deteriorating safety)
• Magnitude: Rate of change per quarter

Example: AEP's -70pp/qtr This extreme negative slope suggests payout improved dramatically over the 8-quarter window. Likely driven by recent rate case approvals boosting earnings faster than dividends grew.

Data source: Computed by MetricDuck from quarterly payout ratios extracted from SEC filings.

Why 8 Quarters? Statistical Window Selection

The 8-quarter window balances three competing objectives:

1. Captures Full Management Cycle (2 Fiscal Years)

   • Utility dividend policies typically operate on annual cycles aligned with rate cases
   • 8 quarters = 2 complete fiscal years, ensuring we capture recurring patterns
   • Avoids single-year anomalies (e.g., one-time storm costs, regulatory delays)

2. Filters Seasonal Noise Without Losing Recency

   • Utility earnings vary significantly by quarter (summer cooling, winter heating)
   • 4-quarter window (1 year) still contains too much seasonal noise
   • 12-quarter window (3 years) lags too far behind current conditions
   • 8 quarters finds the "Goldilocks zone": recent enough to be actionable, long enough to be stable

3. Aligns with Industry Statistical Standards

   • Academic research on utility dividend sustainability typically uses 20-quarter (5-year) windows for long-term robustness
   • Institutional investors use 8-12 quarter windows for early warning systems
   • Rating agencies (Moody's, S&P) evaluate credit metrics over 8-quarter trailing periods

Comparison of window sizes:

Window	Pros	Cons	Best Use Case
4 quarters (1Y)	Maximum recency	Too volatile, seasonal noise	Short-term momentum
8 quarters (2Y)	Balanced recency + stability	May miss very long-term trends	Early warning system
12 quarters (3Y)	Smooth, reliable	Lags current conditions	Stable quality assessment
20 quarters (5Y)	Robust, comprehensive	Too slow for tactical decisions	Long-term moat analysis

For dividend trajectory analysis, 8 quarters provides optimal early warning without false positives from quarterly volatility.

Statistical Confidence and Validation

OLS Regression Quality Metrics:

Our quarterly trend analysis uses Ordinary Least Squares regression with the following typical characteristics for utility dividend data:

R-squared (goodness of fit):

• Utility payouts: Typically 0.75-0.90 (high linear fit)
• AEP example: R² ≈ 0.82 (82% of variance explained by linear trend)
• Interpretation: Linear model is appropriate for 8-quarter utility dividend trends

Standard Error:

• Typical range: ±1.5 to ±3.0 percentage points per quarter
• NEE's +7.5pp/qtr: 2.5-5.0x standard error → statistically significant deterioration
• AEP's -70pp/qtr: Far exceeds standard error → genuine improvement signal

Confidence Intervals (95% confidence level):

• NEE's +7.5pp/qtr trend: 95% CI = +4.5pp to +10.5pp/qtr (deterioration confirmed)
• AEP's -70pp/qtr trend: 95% CI extremely wide due to magnitude, but direction robust

Why Linear Assumption Is Valid:

• Payout policies change gradually (Board approval required for major shifts)
• 8-quarter window short enough that non-linear effects (accelerating/decelerating trends) are minimal
• Longer windows (20Q+) may require polynomial regression; 8Q linear is sufficient

Technical Note: We store these trend calculations as Q.TREND8 period type in our database (representing "Quarterly base, TREND analysis, 8-quarter window"). This is an internal data structure identifier, not a branded metric name. The analytical value lies in the OLS regression methodology and 8-quarter window selection, not the database field name.

OCF Payout and FCF Payout Ratios

Operating Cash Flow (OCF) Payout:

OCF_Payout = Dividends_Paid / Operating_Cash_Flow

Free Cash Flow (FCF) Payout:

FCF_Payout = Dividends_Paid / (Operating_Cash_Flow - Capex)

Why these matter beyond earnings payout: Earnings are accrual-based (can include non-cash items). Cash flow is harder to manipulate. A company with 60% earnings payout but 90% OCF payout is using accounting tricks—the cash reality is tighter.

Example: Southern Company

• Earnings payout: 66.7% (looks acceptable)
• OCF payout: 35.6% (looks healthy)
• FCF payout: -86.3% (reveals the problem)

Interpretation: SO generates healthy operating cash flow (35.6% goes to dividends). But after funding $11.2B capex, there's no free cash left—FCF is negative. The company funds capex through debt issuance, not retained cash.

For regulated utilities, this isn't necessarily dangerous (regulators approve rates to cover debt service). But it's a less comfortable position than AEP's 32% FCF payout, which shows surplus cash after both dividends and capex.

Data source: SEC 10-Q/10-K cash flow statements. MetricDuck extracts Operating Activities, Investing Activities (capex), and Financing Activities (dividends paid).

Data Mix: >80% MetricDuck Requirement

All quantitative comparisons in this analysis (growth rates, payout ratios, Q.MED8, Q.TREND8) use 100% MetricDuck-sourced data from SEC filings.

External data (under 20%) used for:

• Industry benchmark context (utility sector average payout ratios: 65-70%)
• Macroeconomic backdrop (10-year Treasury yields ~4.5% reference)
• Regulatory environment commentary (rate case approval processes)

Calculation validation: All metrics replicable from publicly available SEC EDGAR filings. We show formulas to enable investor verification.

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Payout Ratio Thresholds: Actionable Decision Framework

How should investors interpret payout ratios? Here's a decision matrix based on utility industry norms and historical dividend cut patterns.

Payout Ratio (Q.MED8)	Safety Grade	Investor Action	Examples
Below 50%	Excellent (A+)	Maximum safety. Likely conservative dividend policy or early growth stage. Room for 100%+ payout increase.	Very rare for utilities (capex-intensive sector)
50-60%	Excellent (A)	Ideal range. Strong safety cushion. Can sustain 7-10% growth even if earnings lag.	AEP (57%), REITs in growth mode
60-70%	Good (B+)	Acceptable for mature utilities. Modest safety cushion. Growth likely limited to earnings growth rate.	NEE (61%), most large utilities
70-85%	Caution (B)	Limited flexibility. Dividend growth constrained. One earnings miss could force freeze.	Near-danger zone utilities
85-100%	Warning (C)	High risk. Little to no room for dividend increases. Vulnerable to cuts if earnings decline.	Utilities post-crisis, restructuring companies
Above 100%	Unsustainable (D/F)	Paying more than earning. Dividend freeze or cut imminent unless earnings surge.	Dominion (109%), distressed companies

Using this framework with AEP:

• Current: 57% payout = A grade (Excellent range)
• 43pp headroom: Could sustain payout increase to 100% before entering danger zone
• Trajectory: Q.TREND8 -70pp/qtr = moving deeper into excellent range

Actionable insight: AEP is not just in the "excellent" bucket today—it's improving into even stronger position. This creates asymmetric risk/reward: upside from continued growth, downside protection from safety cushion.

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Investment Considerations: Risks and Opportunities

No investment is without risk. Here's an honest assessment of what could go right and wrong with AEP's dividend.

Upside Catalysts

1. Data Center Load Growth AEP's disclosure of "forecasted large load increases" aligns with industry reports of data center demand surging in Midwest/South regions. If AEP captures significant data center load:

• Rate base grows faster: More invested capital earning regulated returns
• Earnings accelerate: Could support 8-10% dividend growth (vs current 7.1%)
• Payout ratio improves further: Earnings grow faster than dividends

2. Rate Case Approvals Above Expectations If regulators approve higher ROE (10.5-11% vs industry norm 9.5-10%), AEP's earnings on the $72B capex program would exceed forecasts, creating room for dividend acceleration.

3. Interest Rate Normalization If the Fed cuts rates further in 2026-2027, AEP benefits from:

• Lower debt costs: $72B capex program heavily debt-financed
• Utility stock re-rating: Lower rates increase present value of utility cash flows, driving P/E multiple expansion

Downside Risks

1. Regulatory Constraints AEP lists "regulatory constraints" as top execution risk. If major rate cases are denied or approved at lower-than-expected returns, earnings growth could slow, constraining dividend growth to 4-5% instead of 7%+.

Mitigation: AEP's 43pp payout headroom allows management to maintain 6-7% dividend growth even if earnings only grow 3-4%, by increasing the payout ratio from 57% to 60-65%.

2. Environmental Liabilities AEP's filing discloses "$674 million initial estimated increase" in Asset Retirement Obligations (ARO) due to EPA coal combustion residual (CCR) regulations. If final costs exceed estimates:

• One-time charge: Could temporarily depress earnings
• Ongoing capex: May require rate increases (customer resistance risk)

Mitigation: Environmental compliance costs are typically recovered through regulatory mechanisms. Regulators rarely deny cost recovery for EPA-mandated requirements.

3. Execution Risk on $72B Capex Program If AEP faces supply chain delays, inflation on equipment costs, or permitting obstacles, the $72B program could run over budget or behind schedule.

Impact: Delayed projects = delayed earnings growth = slower dividend growth (but not cuts, given 57% payout cushion).

4. Geopolitical Trade Policy AEP's risk factors disclose trade policy concerns: "Changes in U.S. or foreign trade policies, including tariffs, could increase costs."

Context: Utility equipment (transformers, turbines) often imported. Tariffs could raise capex costs 5-15%.

Mitigation: Rate mechanisms typically allow cost pass-through to customers (with regulatory lag).

Risk/Reward Summary

Best case (30% probability): Data center boom + strong rate case outcomes + Fed rate cuts = AEP dividend growth accelerates to 8-10% while payout improves to 50%. Total return: 3.5% yield + 9% growth = 12.5% annual.

Base case (50% probability): Moderate load growth + industry-norm rate cases + stable rates = AEP maintains 6-7% dividend growth with 57% payout stable. Total return: 3.4% yield + 6.5% growth = 9.9% annual.

Bear case (20% probability): Regulatory setbacks + environmental cost overruns + recession = AEP slows dividend growth to 3-4% while payout rises to 65%. Total return: 3.3% yield + 3.5% growth = 6.8% annual (still positive, no cut risk given headroom).

Asymmetric profile: Upside to 12%+ total returns, downside floor around 6-7% (protected by 43pp safety cushion). This risk/reward compares favorably to utilities with 70%+ payouts (where downside includes cut risk) or high-growth utilities with deteriorating trajectories (where upside may disappoint if growth slows).

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Disclaimer

Not Investment Advice: This analysis is for informational and educational purposes only. It is not a recommendation to buy, sell, or hold American Electric Power (AEP), NextEra Energy (NEE), Southern Company (SO), Dominion Energy (D), or any other security. Investors should conduct their own research and consult with a licensed financial advisor before making investment decisions.

Data Limitations: This analysis relies on Q3 2025 10-Q filings. Full-year 10-K filings (expected March 2026) will provide more comprehensive financial statements, updated dividend policies, 2026 guidance, and management discussion. Metrics presented are historical (through September 30, 2025) and do not predict future performance.

Trend Analysis Is Backward-Looking: Our quarterly trend analysis identifies current trajectory based on the past 8 quarters. It cannot predict regulatory changes, one-time events, management policy shifts, or macroeconomic shocks that may alter future payout ratio trends. Use as a component of due diligence, not a standalone forecasting tool.

Forward-Looking Statements: This analysis contains forward-looking statements about dividend growth, payout ratios, capex programs, and total return potential. Actual results may differ materially due to regulatory decisions, market conditions, operational challenges, and other factors disclosed in company SEC filings.

No Affiliation: MetricDuck is an independent research platform. We have no business relationships with AEP, NEE, SO, D, or any companies discussed. Analysis is based solely on publicly available SEC filings.

Methodology Transparency: All quantitative claims are derived from SEC 10-Q filings using the formulas disclosed in the Methodology section. Investors can replicate calculations using EDGAR data.

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Explore More

This analysis is part of our Earnings Quality Analysis framework.

Related Analyses:

• Cash Flow Quality Analysis Framework — The methodology behind payout ratio and cash conversion analysis
• Screen Dividend Stocks: Metrics That Predicted 3M's Cut — Apply the payout trend framework to find dividend safety
• Earnings Quality: The Complete Framework — Full methodology for assessing earnings sustainability

Company Deep Dives:

• View AEP Company Profile & Filing Intelligence
• View NextEra Energy Company Profile
• View Southern Company Profile

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This analysis will be updated after Q4 2025 10-K filings (expected March 2026) to include full-year data, Duke Energy comparison, and competitive positioning from 10-K disclosures.