Roger S. Conrad

This Aggressive Income Portfolio holding stands to benefit from Australia's transition to clean energy.

Investments in solar power, the electricity grid, pipelines and gas-fired power plants will drive earnings and dividend growth at this utility over the next five years.

Sometimes a rising tide lifts all boats. The sharp recovery in oil and gas prices since mid-February has convinced all too many investors that the risk of further distribution cuts among energy-focused master limited partnerships (MLP) has declined. The immediate response to the indiscriminate selling of late 2015 and early 2016 has been a wave of indiscriminate buying. But selectivity will be critical going forward.

Many of our Portfolio holdings have rallied hard over the past months, giving investors another opportunity to exit weaker names and take some profits off the table in their big winners.

The minimal premium involved in Great Plains Energy's proposed takeover offer for Westar Energy underscores how stretched valuations have become in the utility sector.

After plunging almost 50 percent from early May 2015 to mid-February 2016, the Alerian MLP Index has defied the critics and torched slow-to-react short sellers by surging 45 percent since its nadir. But the easy money has been made: Investors must now focus on which names are best-positioned to grow in an environment where energy prices remain lower for longer.

We cash out of one of the riskier holdings in our Aggressive Income Portfolio for a 13.5 percent gain and replace the stock with a best-in-class name.

We’ve enjoyed the recent rally in equity markets immensely, with our laggards finding their footing and a handful of the names in our Conservative Income Portfolio hitting all-time highs. But stretched valuations increase the risk that results will disappoint the market’s lofty expectations. When investors disregard valuations to pay this much for dividends, the risk of a selloff increases. Meanwhile, first-quarter results from the essential-service companies that we track in our Utility Report Card reveal warning signs that corroborate our concerns about weakness in the US economy. a number of electric and gas utilities reported slumping sales to industrial users. Although utilities generate the preponderance of their cash flow from residential and commercial customers and shouldn’t be troubled by this headwind, weakness in this segment suggests that activity in this part of the economy have continued to slow. Against this backdrop, investors should continue to exercise caution on cyclical businesses and names with excessive leverage. You can also play offense by setting limit orders to buy high-quality utility stocks at dream prices that would only be hit in the event of a significant pullback in the broader market. None of the 214 essential-service companies that we cover announced a dividend cut over the past month. But elevated valuations and potentially slowing growth suggest that investors should consider reaping at least a partial profit on some of the gains earned during the recent rally. Those looking to deploy capital should scrutinize the soil before they sow their seeds.

We review our investment strategy in light of our macro outlook and key takeaways from first-quarter earnings.

The recent rally in utility stocks has pushed valuations to elevated levels and lowered dividend yields. We explain our strategy for navigating this environment.