Roger S. Conrad

Will the Federal Reserve really “taper” off its easy money policy? The stock market has already reacted, with dividend-paying stocks leading the selling: The Dow Jones Utility Average is now flat for the fourth quarter, after being up better than 5 percent through mid-November.

Fear of rising interest rates again appears to be triggering selling of utility stocks. I’ve shown over and again that the sector’s so-called interest rate sensitivity is a false relationship over any recent period longer than a few weeks. Consequently, lower prices should be viewed as a buying opportunity for recommended stocks.

Our favorite Canadian midstream companies–names that own pipelines and processing capacity–generate the majority of their cash flow from fee-based services, a business model that provides a degree of protection against volatile oil and gas prices.

These utilities could be due for a dividend cut. 

Part of me wants to say, “It’s about time.”

But Moody’s decision last month to put $400 billion-plus of sector debt on review for upgrade is unabashedly welcome news for utilities.

Healthy growing businesses produce rising dividends, which in turn push share prices higher: That’s the utility investor’s road to superior and safe long-term returns. And if operating results of our Portfolio companies are any indication, it’s still wide open.

Since World War II, no regulated utility has ever failed to make its bondholders whole from disaster. That gives utility bonds a level of safety no other sector can match, particularly after 11 years of systematically cutting debt and operating risk.

Utility bonds’ years of being under-rated may be coming to an end, now that Moody’s is considering a sector-wide upgrade. But for now, they’re under-priced and therefore yield more than debt of equivalent real risk.

Australia is blessed with immense resources wealth, geographic proximity to emerging Asia, a pro-business government in rough fiscal balance, conservative banking policies, a corporate ethos for paying generous dividends and a currency that keeps pace with global inflation pressures over the long haul.

In short, it’s ripe with high-income opportunities for discriminating investors. And with the US dollar up 14 percent against the Australian dollar this year, great companies are selling at a discount.

Barring a real financial earthquake, this will be the ninth year of rising interest rates since 1992.

2013 will also be the eighth of those nine that utilities and other dividend paying stocks finished in the black. The only exception was 1994, when deregulation fears upended electricity and communications.

Utilities also rose eight years when rates fell. All their biggest declines, however, were during years of falling interest rates, particularly 2008.

Utility stock prices ultimately reflect the health of underlying companies. Stocks of financially healthy companies with growing dividends always move higher. But when an economic calamity brings interest rates lower quickly, they can drop in a hurry.

No group of dividend-paying stocks has been more profitably shorted the past few years than high yield telecoms. Short sellers make their money when stock prices fall. And sector companies have not only cut dividends eight times since 2009, but we’ve seen a pair of bankruptcies as well.