Issues

Utility stocks have posted fourth-quarter gains 36 times since 1969. But last year the Dow Jones Utility Average dropped almost 4 percent, virtually all of it during the first two weeks of November.

As we enter the fourth quarter of 2013, a number of trends and developments have investors flashing back to the final three months of last year.

The government is again in budget disarray and the deadline for default is fast approaching. The US economy is still plodding, with second quarter GDP growth of 2.5 percent. The gap between rich and poor nations in the eurozone continues to grow. And softer Asian growth is still shaking up global natural-resource markets.

But there are differences from last year.

For one thing, the stocks are cheaper. Despite what’s shaping up as a solid year for business, conventional wisdom since late April has held that dividend-paying stocks are bond substitutes—and that a change in Federal Reserve policy to “tapering” is about to drive them off a cliff.

My feature article presents more evidence that the bearish thesis about utilities' sensitivity to interest rates is more sensationalism than sense. But the more important question is, what if great companies sold off enough to make them bargains again?

The weight of evidence in this month’s Utility Report Card indicates that real bargains have emerged, three of which I am adding to my Conservative Income Portfolio. 

August was a down month for utilities and other essential services companies—likewise the broad stock market. That continues a trend beginning in late April, when fears first stirred of an end to Federal Reserve easing.

Since then, the Fed has not changed policy. But the markets have acted as though much higher interest rates are a done deal. The yield on the benchmark 10-year Treasury Note yield has nearly doubled. And expectations are we’ll see it at 4 to 5 percent, as the precursor to a dramatic, across the board rise in rates.

This inaugural issue continues my almost three decades of covering essential-services stocks, with a few changes I think you’ll find useful.

My approach, as always, is to focus on companies which pay safe, growing dividends that will build our wealth over time. Names that provide essential services--electricity, heating, communications, water and pipeline capacity--enjoy stable demand and generate reliable cash flow, regardless of economic conditions or Wall Street’s latest investment fad.

More than 100 years after these industries came into being, they’re more critical than ever to a functioning society. Usage can rise and fall from quarter to quarter, or even year to year. But as the global economy grows, so do these businesses--and the benefits accrue to shareholders in the form of rising dividends and capital appreciation.

No merger between regulated utilities has ever failed to produce a stronger, more viable entity. Nor has any regulated utility ever vanished, save through consolidation. Even the owner of Three Mile Island--the former Metropolitan Edison--was able to come back from the 1978 accident. And investors who bought at the bottom realized a 35-to-1 return on their money over the subsequent decade.

No other industry can make these claims. That’s not to suggest that regulated utilities haven’t suffered severe setbacks at times; however, given the nature of the assets that these companies own, stocks and bonds issued by essential-service providers usually recover from whatever disaster befalls them.