Roger S. Conrad

The Dow Jones Utility Average hit an all-time high this month, raising the bar of expectations to levels that will be difficult to meet, let alone beat. Investors may be in for a bit of déjà vu: The sector last reached these lofty heights in summer 2016, at which point the Dow Jones Utility Average suffered a roughly 15 percent pullback. This correction propelled our position in ProShares UltraShort Utilities (NYSE: SDP)—an exchange-traded fund that’s designed to deliver 2 times the Dow Jones US Utilities Index’s inverse daily return—to a roughly 25 percent profit. Over the past year, these gains have evaporated with the sector’s run-up. But with the Dow Jones Utility Average trading at historically unsustainable valuations, we’re comfortable holding a hedge position that will thrive when the sector inevitably reverts to the mean. Will utility stocks suffer a pullback this summer? The answer depends, to a large extent, on the direction of the US stock market, which has climbed higher while shrugging off political turmoil and middling economic growth. Most of the companies covered in our Utility Report Card will report second-quarter results in late July and early August, creating the potential for company-specific sell-offs. The Federal Reserve’s monetary policy could also give investors an excuse to take profits; however flawed, the conventional wisdom holds that rising interest rates represent a headwind for utility stocks and other dividend-paying equities. Of course, the market can always remain irrational for months—or even years. Although many of our Portfolio holdings trade above our buy targets (a high-quality problem), the market isn’t bereft of opportunities—this issue highlights some of our favorite investment ideas. That said, investors may want to consider taking a partial profit off the table in some of their highest flyers. Better buying opportunities will come again.

We take a look at the handful of Portfolio holdings that reported first-quarter results after the May issue hit the web.

Over the past 12 months, the difference between the top and bottom performers in the Alerian MLP Infrastructure Index amounted to about 60 percentage points. Capturing this upside requires on-the-ground intelligence, which is why we attend the MLPA Association's annual investor conference every year.

AES Corp announced the redemption of its 6.75% Series-C preferred shares.

This month’s update to the Utility Report Card includes our analysis of first-quarter earnings and guidance for more than 200 essential-service stocks, while the feature article delves into some of the key trends that emerged during this exhaustive process. With utility stocks still trading at elevated valuations, our investment strategy hasn’t changed appreciably; investors should remain disciplined and avoid chasing stocks beyond our value-based buy targets. At the same time, solid first-quarter results underscore the strong fundamentals that should drive above-average earnings and dividend growth for our favorite utility stocks. Sentiment toward utility stocks remains bullish. NextEra Energy’s (NYSE: NEE) share price rallied to a new all-time high, despite the Public Utility Commission of Texas rejecting its proposed purchase of Oncor Electric Delivery—the company’s second deal failure in two years. But high valuations create lofty expectations, increasing the likelihood that investors will view any hiccup, real or imagined, as an excuse to take profits.

Earnings season provides a deluge of information about specific companies as well as early insight into industry-level trends.

Several names on our Endangered Dividends List slashed their payouts over the past month.

Utility stocks offer exposure to strong underlying fundamentals, but historically elevated valuations mean that investors must stay disciplined.

A big deal promises to accelerate this pipeline company's dividend growth.

A new deal with regulators and ample investment opportunities to meet de-carbonization goals make this international utility a winner.