Shares of utilities, which provide water, electricity and gas, are continuing their upward march as investors seek safety following the outbreak of coronavirus in China and its spread globally.
The iShares S&P 500 Utilities Sector Index (LON:IUUS) has risen 8.8% so far this year, just a bit behind the 11% gains technology stocks delivered over the same period. This robust performance by the utility stocks comes after they surged more than 25% in 2019.
The rationale for this makes sense. Utilities are generally considered a defensive play—rising on fears of a market downturn. After all, people still need to pay gas and electric bills each month, even when they stop spending on expensive dining and vacation travel.
Though a drastic market correction appears unlikely at this point, the coronavirus outbreak in China, and a relentless rally in technology shares have made some investors nervous about the future. Indeed, at 29 times earnings, tech stocks were traded at a 28% premium to the S&P 500, the highest since the start of the U.S. bull market in 2009.
Apple's (NASDAQ:AAPL) warning earlier this week that it will miss its quarterly revenue forecast because of COVID-19, showed it doesn’t take much to change the previously rosy outlook.
All of which is a good reminder for investors that it's prudent to keep some defensive stocks in one's portfolio, as a hedge against extremely volatile periods. The highly regulated nature of their revenue means utilities can generate stable cash flow while offering steady dividends no matter how turbulent geopolitical headwinds become.
Power, Gas And Water Providers Offer Safety, Steady Income
Long considered an appropriate fixed income standard for retirees, utilities that provide power, gas and water to consumers don't just pay dividends. In general they also regularly increase those payouts, in many cases they've been boosting their dividends for decades. Holding these shares over the long-term is a great way to insure a steady income flow with above-average yields, even when other areas of the market go through a consolidation.
After about a 30% rally in the past one year, it's likely the best time to buy these stocks is behind us.
Shares of American Water Works (NYSE:AWK), a Camden, N.J.-based utility that provides drinking water and other water-related services in multiple states, have risen about 17% this year; the stock was trading at $140.12 yesterday.
Similarly, Evergy (NYSE:EVRG), which provides electricity to customers in Kansas and Missouri, has gone up 13% this year, benefiting from strong demand for utility shares. It closed yesterday at $73.91.
Nevertheless, the dividend yields for both stocks still look attractive when compared to the yield on the 10-year U.S. Treasury note, which was 1.564% on Wednesday. Evergy, for example, pays $0.505 a share each quarter, which translates into 2.79% dividend yield on an annual basis. American Water Works has a similar quarterly payout but yields 1.44%.
While U.S. based utility stocks have become more expensive, some companies operating north of the border might be considered bargains.
Toronto-based Enbridge (NYSE:ENB), the largest pipeline operator in North America, offers a juicy 5.84% annual yield. The company's pipeline network handles 28% of the crude oil produced in North America; it moves about 22% of all natural gas consumed in the U.S., serving key supply basins and demand markets.
Given this significant role in the region’s energy infrastructure, Enbridge stock is a relatively safe bet for the long-run. Over the past 20 years, its payout has grown at an average compound annual growth rate of 11.7%. Shares closed yesterday at $41.97.
Utilities focusing on renewable sources of energy are another attractive opportunity for investors. Innergex Renewable Energy (OTC: INGXF), a renewable power producer, has soared 29% in 2020, after a 34% rally last year. It currently yields a respectable 3.27%; the stock closed yesterday at 16.54.
According to a recent report from Bloomberg:
“With a scarcity of quality public companies in the pure-play renewable space, Canada has a handful of them with solid management track records that have been around for a long time.”
Bottom Line
While technology stocks have dominated the equity market in past years, there are still some sectors that provide safety and consistent returns even during unexpected downturns. Utility shares squarely fit that bill.