It’s no secret this economy is slowing, at least in the near term. That’s given us contrarians a (time-limited!) buy window on the “dividend twofer” we’re going to dive into today.
One of the tickers we’ll talk about below pays a sturdy 7% now. The other yields 4.9% and sports a source of upside no one has noticed (except us, of course!).
Both are utility plays, which tend to rise as the economy slows, lowering interest rates as it does. Let’s get into this opportunity, starting with last week’s GDP report, which said, yes, the US economy did shrink to start the year.
Slowdown Adds to Utilities’ Upside
Sure, GDP growth slowed in the first quarter, to the tune of 0.3%. But the underlying numbers were actually more bullish than the headlines suggested.
That’s because the pullback was in large part due to a spike in imports as retailers stocked up ahead of Trump’s tariffs, and imports are calculated as a drag on GDP. That trend is likely to fade. Government spending also dropped in light of DOGE cuts, while consumer spending largely held up.
We’ll take a GDP dip caused by temporary factors like import spikes ahead of tariffs and a likely one-off drop in government spending.
But the truth is, a slowdown (even if a mild one) is likely. More evidence came in last week’s initial jobless claims, which came in at 241,000 for the week ended April 26, above the 225,000 expected.
“Trump Put” on Interest Rates Works in Our Favor
This tariff situation is changing daily (hourly?), with the “Liberation Day” levies on, then off. Then, electronics were exempt from China tariffs. And more recently, levies from car parts were waived for vehicles built in the US.
More dovish moves are likely on the trade front. But wherever we land, tariffs will be higher than they were pre-January 20. They’re a key part of Treasury Secretary Scott Bessent’s three-part plan to bring down interest rates:
- Tariffs, to slow growth (and with it inflation).
- Deregulation, to help offset the tariff drag, and …
- Drilling, to bring down energy prices.
But as we’ve written before, Bessent is focused on the 10-year Treasury rate, benchmark for business and consumer loans of all types.
Case in point: When the yield on the 10-year famously spiked in early April, Trump (no doubt hearing Bessent’s pleas) put the bulk of the Liberation Day tariffs on pause.
In other words, we’ve finally found the “Trump Put” for stocks—but it isn’t in the stock market. It’s in the bond market!
That push for lower rates is a rare policy-driven tailwind we’re happy to take advantage of. And as we’ll see below, high-yielding utility stocks are a great way to do so.
The 10-year knows the story on the latest economic numbers, too. Because beyond the GDP report, the personal consumption expenditures (PCE) index, the Fed’s favorite inflation gauge, also came out last week. And it actually dipped from a year ago, to 2.3% from 2.7%.
10-year Treasury rates fell in response—as you’d expect from a bond market anticipating an economic slowdown.
A slowdown is not great news, of course, but there is a silver lining for us: It gives us the chance to buy those two high-yielding utilities now, before their next leg up.
Utility Pick No. 1: Reaves Utility Income Fund (UTG)
We’ve talked about the Reaves Utility Income Fund (NYSE:UTG) many times before, and with good reason. It’s returned a sweet 41% for members of my Contrarian Income Report service since we added it to our portfolio in June 2023—less than two years ago.
As the name says, UTG holds utility stocks—mainly top US names like Entergy Corp. (NYSE:ETR), Xcel Energy (NASDAQ:XEL) and CenterPoint Energy (NYSE:CNP), as well as “utility-like” firms such as pipeline operator Enterprise Products Partners (NYSE:EPD).
Let’s take a look at that holding period for a second; it clearly shows that every time the 10-year rate tops and moves lower, UTG goes from trading at a discount to net asset value (NAV)—the key valuation metric for CEFs—back to premium territory:
UTG’s Discount (or Premium!) Let’s Us “Surf” the 10-Year Rate
With a slowdown ahead, I expect UTG’s current par valuation to move into premium territory. That amounts to gains to go with the fund’s 7% dividend—a payout that rolls in monthly, is rock-steady—and even offers a hint of growth (and special dividends):
Source: Income Calendar
That “recession-resistant” income stream, potential for a higher premium (and gains) as the economy slows, and lower volatility (UTG sports a “beta” rating of 0.84, meaning it’s 16% less volatile than the S&P 500), make it a smart buy now.
Utility Pick No. 2: Dominion Energy (D)
If you’re looking to go the single-stock route, consider Virginia-based Dominion Energy (NYSE:D), which provides electricity to 3.6 million homes and businesses in Virginia (hold that thought!), North Carolina and South Carolina. It also pipes natural gas to about 500,000 users in South Carolina. The stock yields 4.9%.
Utilities have been among the few sectors to hold their own this year, and D has done the same—though it has trailed the sector (shown below in orange by the benchmark utility index fund, XLU):
D’s “Utility Lag” Is the First Sign It’s a Bargain …
Long-time readers will know that this is because D is still in the “dividend doghouse” for a cut management brought in back in 2020 (showing just how long dividend investors’ memories are!)
The reason back then was too much debt. But here’s the thing: Unless management is a complete clown show (which D’s is certainly not), the safest dividend is often the one that’s been recently cut. And D has more than served its payout penance, with the dividend holding its own (and even being hiked once) since.
Nonetheless, the company’s share price fell behind the payout once the cut was made. Given the tendency for share prices to track dividend growth higher, that lag is the second sign we’re getting a deal here:
Lagging Share Price Is Our Second “Bargain Barometer” …
Lastly, on the bargain front, D trades at 16.6 times forward earnings, below its five-year average of 19.3—though a strong earnings report last week has pushed that up, making our buy here a bit more urgent.
… And Its Below-Average (But Rising) P/E Is the Third
Frankly, it’s about time investors started to forgive and forget. For one of the main reasons why, let’s swing back to Virginia, D’s home state. As you may know, Virginia is ground zero for the data-center boom that’s supporting AI’s ongoing growth.
And it’s not just AI: Electric cars continue to hit the road, too. And more consumers are looking to heat pumps—a shift that’s baked in, no matter what happens in Washington. Dominion is likewise projecting a doubling of demand for its power by 2039.
The company is also relatively insulated from tariffs. It expects to pay around $123 million in steel and aluminum levies on its Coastal Virginia Offshore Wind project. But that’s a small slice of the project’s $10.8-billion price tag and the $4.1 billion of revenue D generated in Q1 alone. And of course, the tariffs could always be cut or removed.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."