Guest Contribution by Tom Hutchinson, Chief Analyst, Cabot Dividend Investor
What a wild, unpredictable three-plus years for stocks.
The market crashed more than 30% when the pandemic hit and the government crashed the economy with strict lockdowns. But then stocks mounted an amazing recovery that began shortly after the lockdowns began, even though they would continue for more than a year. That was a head-scratcher.
Stocks fell into another bear market last year, and the Fed raised the Fed Funds rate at the steepest pace in decades to fight off 40-year-high inflation. At the beginning of this year, the vast majority of pundits had forecast more of the same in the first half of 2023. Instead, the S&P 500 rallied 19.5% in the first seven months of the year into a new bull market.
But that’s just the market indexes. It has been interesting under the hood as well. Last year, the worst-performing market sector by far was technology. This year it is by far the best-performing sector. Last year, energy was the best-performing sector. In the first half of this year, it was the worst-performing. But that previously beleaguered sector has made a strong comeback since, as oil prices are on the rise.
Other sectors like consumer discretionary stocks that had been among the worst sectors last year are among the best this year. Defensive sectors, including healthcare and utilities, that delivered stellar returns last year have been dogs this year. In fact, the utility sector has displaced energy as this year’s worst-performing S&P 500 sector.
This year’s market rally has stalled as stocks are pulling back in the month of August. But a pullback is normal and even healthy after the S&P mounted a better than 30% rally from the low. Most pundits are now optimistic about the rest of this year as inflation has fallen fast, the Fed is about done hiking, and there is no recession in sight. Maybe the pundits are right. But as the past several years illustrate, you never know.
The last few years have also illustrated a tendency for downtrodden stock sectors to rise from the canvas and become among the market’s best performers. Many utility stocks are currently near multi-year lows – but not because of the operational performance of the companies, which has largely remained solid.
You can download Sure Dividend’s list of all utility stocks (along with important financial ratios such as dividend yields and payout ratios) by clicking on the link below:
Utilities are dirt cheap in an expensive market. They are also stellar relative performers in a slowing economy. But they are likely to rise from the current dark depths even if the economy remains buoyant. Sure, the stocks could continue to flounder for longer. But it’s a great bet that things continue to be unpredictable and these stocks are a lot higher in six months or a year.
There are two utility stocks that are particularly attractive right now. They are not just stodgy and boring stocks that may have the benefit of good timing. Both of these stocks have a long history of not only blowing away the returns of the utility index but dwarfing overall market returns as well.
Beaten-Down Utility Stock #1: Brookfield Infrastructure Partners (BIP)
Bermuda-based Brookfield Infrastructure Partners is one of the largest globally diversified owners and operators of infrastructure assets in the world. The master limited partnership (MLP) focuses on high-quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.
Infrastructure is defined as the basic physical structures and facilities needed for the operation of a society or enterprise. It includes things like roads, power supplies and water facilities. Not only are these some of the most defensive and reliable income-generating assets on the planet, but infrastructure is rapidly becoming a more timely and popular subsector.
The world is in desperate need of updated infrastructure. Developed economies have badly aging systems in need of replacement and emerging markets have infrastructure that is woefully insufficient to accommodate growing urban populations and more advanced economies. The G-20’s global infrastructure hub estimates that a global investment of $94 trillion will be needed over the next several decades, which is a big opportunity for this income stock.
The private sector is an essential part as governments don’t have all those trillions lying around. Limited partnerships, giant sovereign-wealth funds, and multilateral and development-finance institutions are raising billions of dollars a year for infrastructure investments. It’s almost becoming a new asset class.
As one of the very few tested and tried hands, BIP is right there. It’s been successfully acquiring and managing these properties for more than a decade in a way that has delivered for shareholders.
Brookfield operates a current portfolio of over 1,000 properties in 30 countries on five continents. The partnership operates four segments: Utilities, Transport, Midstream (energy services) and Data.
- Toll roads in South America
- Telecom towers on five continents
- Railroads in Australia and North America
- Utilities in 9 countries
- Midstream energy assets in the U.S. and Canada
- Ports and transportation terminals in Australia, North America, and the U.K.
- Data centers on five continents.
BIP originally began trading in 2008. How has the formula worked out for this income stock? The earnings compound annual growth rate (CAGR) has been 15% from 2009 to 2022. Since the 2008 IPO, BIP has returned 673% (with dividends reinvested), more than twice the return of the S&P 500 during that time.
Meanwhile, the dividend is rock solid with a low 70% payout ratio and a history of steady growth. The payout has grown by a CAGR (compound annual growth rate) of 10% per year since 2009 and the company is targeting 5% to 9% annual growth going forward.
Beaten-Down Utility Stock #2: Xcel Energy (XEL)
Xcel Energy provides all the defensive and recession-resistant advantages of most utilities plus exposure to the fast-growing and highly sought-after alternative energy market. It has the reliability of a utility plus much more growth than average from its sizable clean energy business.
Xcel is a regulated electric and natural gas utility serving 3.7 million electric customers and 2.1 million natural gas customers in eight states, primarily in the northern and southwestern U.S. It is also one of the largest renewable energy providers in the U.S. with about 30% of electricity sales generated from alternative energy sources.
Alternative energy is what separates XEL from the utility pack and makes it a much better investment. It enables investors to play defense and offense at the same time. You get stable earnings and low volatility along with exposure to one of the most exciting and fast-growing areas of the market.
Here are some other things to like about the stock:
- Long-term EPS growth 5% – 7%
- Annual dividend growth 5% – 7%
- Dividend payout ratio 60% – 70%
- Credit ratings in the A range.
Results support the fact that Xcel is an excellent utility stock. XEL produced average annual returns of about 12% for the last 10 years. That’s far better than its peer group over the same time. But that number is after the stock had a steep plunge recently.
While the longer-term trajectory looks excellent, it’s really the recent market action that prompts the recommendation. The stock has gotten very cheap because of near-term circumstances and market gyrations that are unlikely to last.
Don’t miss the resources below for more dividend stock investing research.
- The Monthly Dividend Stocks List
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more