Roger S. Conrad

Utilities have announced a number of spin-offs over the past 12 months. Some are worth your while; some are not.

ONE Gas (NYSE: OGS) has generated a total return of 36.8 percent since joining the Conservative Income Portfolio and has traded above our buy target for much of this year. It's time to cash out.

The bull market’s seventh year is off to a less-than-rousing start for income investors, with the Alerian MLP Index down 11.5 percent and the Dow Jones Utilities Average down 6.5 percent. Even shares of American Water Works (NYSE: AWK), the largest US water utility, have given up 4.7 percent of their value in 2015. Meanwhile, the S&P 500 has gained only 0.7 percent this year. In our coverage universe, the S&P Telecommunication Services Index has emerged as the big winner, eking out a 2.3 percent total return. This weakness in US equities reflects an uncertain macroeconomic environment that’s clouded by China’s slowing growth and the Greek sovereign-debt crisis. A muddy outlook for US economic growth hasn’t helped matters. Speculation about when and to what extent the Federal Reserve will raise interest rates has heightened volatility in the stock market. Meanwhile, oil prices appear poised for another downdraft, now that we’ve passed the peak of the summer driving season. Over the past six years, best-in-class utility stocks have followed market corrections with big-time gains. We expect more of the same once the market settles down, especially if our favorites post solid second-quarter results. Nevertheless, investors have ample cause for caution. The Dow Jones Utilities Average’s performance this year bears an eerie resemblance to 1987, the last time the sector faltered badly after a winning January. And another breakdown in oil prices, an interest rate hike and/or more weakness in China could roil equity markets further. My midyear strategy balances a long-term focus on quality and value with short-term opportunism: By cashing out of outperformers with limited upside, we can stockpile some dry powder to deploy in a correction. We’ve sold about half a dozen Portfolio holdings since mid-2014, booking sizable gains on most. This month, we’re liquidating our position in Conservative Income Portfolio holding ONE Gas (NYSE: OGS) for a 38.1 percent profit. Although the gas utility boasts a solid dividend, the stock trades at 21 times earnings—a lofty valuation that doesn’t reflect emerging questions about future growth.

The utility sector is a mixed bag right now: Some stocks remain at elevated valuations and look ripe for profit-taking; others look like good buys for opportunistic investors.

Heading into earnings season, we expect most of our Portfolio holdings to post solid second-quarter results. Nevertheless, the macro backdrop suggests that investors should take some profits off the table in their big winners and take advantage of any pullbacks to buy high-quality names.

For the second consecutive month, none of the more than 200 essential-services companies covered in our Utility Report Card announced a dividend cut. However, companies with heavy exposure to energy prices—especially crude oil and natural gas liquids (NGL)—remain under pressure and could be at risk of reducing their payouts.

This utility recently doubled its rate of quarterly dividend growth, but the stock is still down 10 percent on the year. Smart investors should take advantage of this opportunity.

This global telecom giant continues to make all the right moves to return to dividend growth, but the stock still trades at a discount.

Recent downside in the Alerian MLP Index reflects a number of factors, including the group's outperformance relative to other energy stocks last year, the market’s growing concern about rising interest rates and worries that the slowdown in drilling activity will limit future growth opportunities.

Here are some of the key themes on our radar as second-quarter earnings season approaches.