By Philip van Doorn, MarketWatch
Corrected to include Dominion Energy’s dividend-cut announcement in July.
Utility stocks are being left behind as equity indexes have risen to records and bond yields have sunk to all-time lows. But if you are looking for income, you need to consider utility stocks.
The S&P 500 Index has rebounded from the Covid crisis, gaining 5% this year. Still, only 44% of S&P 500 stocks are up this year, most notably Apple Inc. /zigman2/quotes/202934861/composite AAPL -2.97% , Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -0.03% and other technology stocks. The benchmark index’s utilities sector was down 7%.
On Wednesday, Mark Grant, chief global strategist for fixed income at B. Riley FBR, pointed out in his “Out of the Box” email that “there is almost no value for the credit risk in corporate bonds.” The Bloomberg Barclays U.S. Aggregate Index of corporate bonds has a yield-to-maturity of 1.17%, with an effective duration of 6.2 years. That yield compares to 0.46% for seven-year U.S. Treasury notes.
At Franklin Templeton’s “Mega Trends Accelerate” webinar Tuesday, Scott Glasser, co-chief investment officer at ClearBridge Investments, said he expected cloud and media companies to continue to perform well, but also suggested cyclical stocks would help balance out the tech exposure.
He expects that over the next few years, “forgotten groups” of stocks, including utilities, will come back into play.” Glasser cited “the appeal of a 3.5% to 4% dividend yield that is pretty secure.” There are 16 utility stocks listed below with yields of at least 3.5%, ranging as high as 5.99% (although one of those, Dominion Energy Inc. /zigman2/quotes/206853976/composite D +0.51% , plans to cut its payout).
It’s easy to understand why prices for most higher-yielding asset classes have increased this year. The Federal Reserve’s bond buying (currently $150 billion a month) has tamped down long-term interest rates, while short-term rates are near zero, along with the federal funds rate. On Wednesday, Federal Reserve Chairman Jerome Powell said the central bank was “determined” to continue its “highly accommodative” policy until inflation rises to a consistent level of about 2%.
The Federal Open Market Committee released median projections Wednesday showing that inflation is expected to remain at or below 2% through 2023. That indicates no change in the central bank’s core policies for years.
Getting back to utility stocks, they are not only down — many have attractive yields, with long track records for sustaining or raising their payouts.
Among the 28 utility stocks currently included in the S&P 500, only eight have cut their dividend payouts over the past 15 years (including the upcoming cut by Dominion Energy), according to data supplied by FactSet. And three of those dividend cuts resulted from spin-offs or sales of large business units.
Here are the two most recent dividend cuts:
• CenterPoint Energy Inc. /zigman2/quotes/206368471/composite CNP +2.22% reduced its payout in April, when the company cut its payout nearly in half and lowered its capital expenditures because of a dividend reduction by Enable Midstream Partners LP /zigman2/quotes/203715383/composite ENBL +8.83% . CenterPoint owns a majority of Enable’s shares.
• Dominion Energy Inc. said in July it was likely to lower its annual dividend to about $2.50 a share from the current $3.76, after completing the sale of its natural gas transmission and storage business to an affiliate of Berkshire Hathaway /zigman2/quotes/200060694/composite BRK.B +1.11% . The deal is subject to regulatory approval.
Both of these dividend cuts emphasized the importance of selecting utility stocks whose businesses are focused on the regulated distribution of power and water, rather than on wholesale energy services. Back in June, John Bartlett, the president of Reeves Asset Management explained how local regulators help ensure that these utilities’ profits rise as they invested in improved or expanded infrastructure.
Aside from CenterPoint and Dominion’s upcoming cut, none of the S&P 500 utility companies have cut dividend payments since 2016. PG&E Corp. /zigman2/quotes/202583141/composite PCG +0.32% , the California electric utility that went bankrupt in January 2019, was removed from the index at that time. The company emerged from bankruptcy in July.