With money market funds and CDs paying 5 percent plus, many investors are asking how dividend stocks can compete on yield.
The far more relevant question: How they stack up on total return, over a meaningful period of time. And on this score, cash alternatives don’t come close to matching up.
Not since 1999 have essential services sectors lagged market averages by this great a margin. Year to date, the Dow Jones Utility Average has dropped by nearly -10 percent. The S&P 500, in contrast, is ahead by 16 percent. And despite losing some momentum recently, the Nasdaq 100 is up better than 40 percent.
The Dow Jones Utility Average is now underwater by nearly -7 percent including dividends so far in 2023. That’s more than 25 percentage points behind the S&P 500, which continues to be pushed higher by momentum-fueled big technology stocks.
In contrast, twice as many companies in my coverage universe (18) have so far raised their 2023 guidance following Q2 earnings as reduced it. And none have cut the longer-term growth guidance that will ultimately drive their share prices higher.
The Dow Jones Utility Average finished 2022 more than 20 percentage points ahead of the S&P 500. So far this year, however, utilities are lagging by roughly the same amount.
The S&P 500’s gains are thanks to the continuing surge in big technology stocks, which led by Apple Inc (NSDQ: AAPL) at 7.673 percent are a record 37 percent of the benchmark index. Meanwhile, the DJUA at -4 percent year to date is tracking weakness in dividend paying stocks—as well as sectors considered “cyclical” and vulnerable to Federal Reserve rate increases and still-elevated recession risk.
The S&P 500 is still a little more than -10 percent below its January 2022 high water mark. But thanks to a buying wave washing over a handful of now very expensive big technology stocks, the index and related ETFs are up 12.8 percent so far in 2023.
The catalyst: An outbreak of interest in stocks perceived as benefitting from adoption of artificial intelligence.
The bulls envision a world where AI is used to augment productivity to transform pretty much every industry. Yet at least so far, there’s been little attention paid to the immense volumes of energy and communications bandwidth to support ubiquitous AI chatbots needed to make that dream a reality.
Earlier this month, New York announced a ban on new natural gas hookups starting later this decade. Then Texas imposed major new restrictions on wind and solar deployment. And both states respectively released plans to spend billions of taxpayer money to build new renewable energy and natural gas generation, if the private sector doesn’t jump fast and high enough.
Not to be left out, Congressional Republicans passed legislation to undo the Biden Administration’s two-year solar panel tariff relief. And the House is threatening to trigger a first-ever US default if Inflation Reduction Act subsidies aren’t unwound, just as the Biden Administration is rolling out all-new restrictions on fossil fuel use including transport.
Is the Federal Reserve about to wrap up this tightening cycle? Many investors appear to be betting on it, with the Nasdaq 100 up almost 20 percent year-to-date.
Tech is the 21st century’s most interest rate-sensitive sector because stocks trade on the promise of future cash flows. But traditional income stocks too enjoyed a big rebound last month: After being deep in the red, the Dow Jones Utility Average is now solidly in the black. And a substantial majority of stocks in my Utility Report Card had a positive Q1, while adding to gains so far in April.
The S&P 500 is still holding onto about half its early 2023 gains. But like other dividend-paying stocks, utilities have gone into reverse this spring, with the Dow Jones Utility Average underwater by nearly 6 percent year-to-date. High inflation and rising interest rates are certainly playing a role in the underperformance. But a more important reason may be investors’ disappointment that last year’s Inflation Reduction Act didn’t spark a more robust industry response.
The S&P 500’s nearly 9 percent year-to-date return and the resilient labor market are raising hopes the US will avoid a recession and deeper slide for stocks this year. I’m not entirely convinced.
Inflation remains untamed and the Federal Reserve will keep pushing interest rates higher to rein it in. And Q1 results we’ve seen so far show pressure on earnings, including some essential services companies.
2022 was the worst year for the stock market since 2008. And bonds suffered their biggest losses since the 1980s. Nonetheless, for the third year in a row, the Dow Jones Utility Average launched a powerful Q4 rally, finishing with a 2.08 percent total return. And that in turn helped carry our Aggressive Holdings ahead 3.5 percent, Conservative Holdings 1.3 percent and Top 10 DRIPs 9.5 percent.
Every January feature article highlights the top picks and pans by sector for the coming year, as well as the past 12-month’s best and worst performers.
Sticking to long-term guidance in face of severe near-term headwinds: That’s the difference maker for investor returns in utilities and essential services stocks this year. And it’s certain to be once again in 2023.
The greatest challenge is the most dramatic increase in interest rates since the 1980s. Debt is an indispensable pillar of financing for capital-intensive sectors like power, communications and water. And even solidly investment grade companies like WEC Energy (NYSE: WEC) have seen their cost of short-term debt increase as much as 350 basis points since the beginning of the year.
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Roger's current take and vital statistics on more than 200 essential-services stocks.