Some clients with growthy, tech-heavy portfolios become addicted to the excitement of such sexy stocks.
Yet in some market scenarios, there can be such a thing as too much excitement, especially for clients so enamored with growth that they stubbornly resist diversification afforded by less alluring sectors.
For these clients, helpful diversification and relative stability, along with good, reliable income can be found in utilities, a decidedly unsexy sector. The worst-performing sector in 2023, some utilities are battered to the point of being real bargains, considering their current rebound potential.
Utilities’ services and products are necessities—unless you live in a barn, and maybe even then. Everyone, rich or poor, usually pays their utility bill first, lest they end up without light, water, heat or air-conditioning. These reliable payments generate predictable revenues, sustaining dividends.
These stocks are far from sizzling, but a modest allocation can provide a measure of safety in turbulent markets. And unlike the growth stocks that really turn clients on, utilities will cuddle up with them during market storms, when sexier stocks suddenly don’t look as good.
Beauty Beneath The Skin
Though utilities stocks have become homelier over the past couple of years because of historically poor price performance, long-term historical averages—such as average annual growth of Select Sector UTI SPDR (XLU), the sector’s largest ETF, of 9.37% over the trailing 15-years as of Dec. 23, according to Morningstar—indicate that mean reversion may be overdue.
Demographic trends support the case for sustained or increasing revenues. Adding new customers may be iffy during some periods, but in recent years, the number of households in the U.S. have been increasing, a trend that analysts expect to continue indefinitely.
Millennials are buying their first homes, grown kids are moving out of their parents’ basements and people are getting divorced, with the result of one household turning into two. Households are also increasing from the associated trend of more and more Americans living alone. All of this means more meters.
So, hanging on to customers is likely, unless the population declines from the nation’s chronic low birth rate. Yet immigration levels more than compensate. And over the past few years, power rates have been increasing faster than inflation.
The result is many utilities have strong fundamentals and balance sheets. In particular, according to Morgan Stanley, the stocks of CenterPoint Energy (CNP), Southern Co. (SO), Public Service Enterprise Group (PEG). and Consolidated Edison (ED) will probably hold their values nicely next year from good earnings and strong balance sheets reflecting fundamental stability.
From an asset allocation standpoint, advisors seeking income through bonds would probably do better using utilities, as the 10-year Treasury rate hovered around 3.9% at Christmas (down from 4.3% earlier in December).
Income Over Growth
The current average dividend yield of XLU is nearly as high—about 3.78% as of Dec. 23, making this sector something of a bond surrogate in equity clothing.
Moreover, bonds of course never give holders a raise, whereas many utilities have a long history of consistently raising dividends. Some are in the venerable dividend aristocrat category: Consolidated Edison, Atmos Energy Corp and Next Era Energy. The latter’s stock price was still down 27% YTD as of Dec. 23 after having sprinted upward a remarkable 28.2% since Oct. 9.