These Unloved High-Yield Stocks Are About To Have Their Day In The Sun…
Investors are beginning to turn their attention back to corporate earnings. They might not like what they see. While actual results are still coming in, we are tracking toward a 3% decline. That would mark the second-straight negative quarter — the technical definition of an earnings recession. This slowdown follows ten straight quarters of uninterrupted growth, including an extended streak of double-digit increases.
By itself, this isn’t necessarily a reason to panic. Still, there are other troubling signs…
Business investment has been tepid. The boom in capital spending on new equipment and factories has stalled, the stimulative effects of corporate tax overhaul wearing off… Meanwhile, the damaging trade war could reignite at any time. The hostilities may even spill over into the currency markets if the White House decided to weaponize the U.S. dollar, deliberately weakening it to put domestic exporters on a more level playing field.
Meanwhile, the global economy continues to cool, particularly across Europe. Even more concerning, China (the world’s economic growth engine) is seeing the weakest economic output in 30 years.
The point is, any of these wild cards could trip up the market. And with the major averages having ascended to record heights, it’s a long way back down if they lose their footing.
Fortunately, there is one resilient group that has little to fear… In fact, the bleaker the economic prognosis, the more attractive this sector looks in the eyes of investors…
With the stock market hitting record highs, most people think we must be in pretty good shape. But hold on a minute…
According to Yale professor Robert Shiller, stocks are 57% too high. That’s 14,000+ points on the Dow. Shiller won a Nobel Prize for his work on stock prices. And if he’s right, millions of investors could be about to see their investment accounts crushed.
Don’t let that happen to you. Click here to see how you can avoid the same fate.
Let’s Get Defensive
There’s no talk of an earnings recession around here. These businesses are expected to deliver average earnings growth of 2% to 3% next quarter – not sizzling, but at least positive.
Not only do these companies have the strongest earnings outlook of any sector, but they are also among the biggest beneficiaries of potential rate cuts. That’s a big reason why these low-beta, slow-movers have suddenly found themselves at the front of the pack and delivering powerful gains. And the more volatile the market, the brighter they shine.
If you haven’t already guessed, I’ve been talking about utilities. You know — the guys you pay each month to have gas, water and electricity piped into your home.
In times of distress, you might cut back on discretionary travel, or clothes, or entertainment – but not your utilities. And you seldom have the option of switching to other service providers, considering most utilities have been granted government-sanctioned monopolies within their operating territories.
#-ad_banner-#What do you get when you combine unwavering demand with a lack of competition? One of the steadiest cash flow streams anywhere – and, hence, ultra-secure dividends. That’s why these conservative stocks are often deemed suitable for widows and orphans.
Over the years, we’ve held a few utility stocks with good results. I just closed my position in U.K. power transmission and distribution giant National Grid (NYSE: NGG) for a modest gain. Before that, we had a stake in Westar Energy, the largest electricity provider in Kansas, until the company was taken private.
But for the most part, regulated utility stocks have been absent from my High-Yield Investing portfolio the past few years. That’s largely because interest rates have been headed higher, and these rate-sensitive stocks often struggle during tightening cycles. They also tend to get overlooked when the economy is strong.
Underweighting this group in our portfolio has been the right call. Over the last three years, the SPDR Utilities Select Sector (NYSE: XLU) has been among the worst performers, posting an average annual return of 8.6%, versus 14.2% for the broader market.
But the door swings both ways. With interest rates headed back down and the earnings picture deteriorating, these defensive stocks have begun to shine. One of my favorite funds, Reaves Utility Income (NYSE: UTG), has delivered a market-crushing gain of 24.8% so far this year.
Not bad for “stodgy” utilities.
Picking The Right Utility Stock
As with any industry, you shouldn’t paint all of these stocks with the same brush. Investment returns can deviate considerably from stock to stock. When choosing a utility for your portfolio, start by asking some basic questions.
— Is the company’s territory experiencing strong population growth, or is the customer base shrinking?
— What does the fleet of generating assets look like (nuclear, renewable, fossil fuels, hydro)? How do operating costs stack up with peers?
— Is the regulatory jurisdiction business-friendly and receptive to rate hike requests?
One of the most important factors is the size of the firm’s rate base. This encompasses all property, plants and equipment (sewer treatment facilities, gas transmission lines, repair trucks, etc.) that are used to provide service.
Rate determinations are always a balancing act. Public utility commissions want to protect consumers from price gouging. But they must also allow utility companies to recover expenses and earn a fair return for stockholders.
Therefore, investments made to expand and upgrade infrastructure often translate into a growing income stream – and resultant dividend hikes.
Action To Take
After years of subpar performance, the utility sector is gaining momentum – and deservedly so. During times of economic stress and market volatility, investors scurry into defensive shelters. We’re not there yet, but the best time to take out an insurance policy is before you need it.
Even if we manage to skirt an economic downturn and market correction, there are worse places to park a little cash. In any case, money is pouring into this sector. The share price of Gabelli Utility Trust (NYSE: GUT) has been pushed 41% above its net asset value (NAV). That’s among the highest premiums I’ve seen.
I don’t currently have any exposure to this group in my High-Yield Investing portfolio. But that’s about to change…
While there are several promising candidates on my radar, only one sports a robust yield north of 6%. And remarkably, it does so with less risk than many of its category peers. Unfortunately, I can’t share it with you today — it just wouldn’t be fair to my premium subscribers.
My advice: start researching this sector for best-in-class portfolio candidates as soon as you can. You’ll be glad you did.
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