Portfolio Article

For the Conrad’s Utility Investor model portfolios, 2024 was a very good year. The Conservative Portfolio with its focus on high income, safety and long-term capital appreciation posted a total return of 15.8 percent. The Top 10 DRIPs’ dividend reinvestment strategy delivered a compound gain of 28 percent. And the Aggressive Holdings’ higher risk/return focus fared best of all, with a 30.2 percent return.

Other than it’s the pending close of the tax year, there’s nothing magical about the final weeks of the year for investors.

The Dow Jones Utility Average’s year to date return is now 20.5 percent. That’s a decline of around -1.4 percent since the Federal Reserve pivoted to lower interest rates on September 18. The DJUA is once again lagging well behind the S&P 500, which as of Friday’s close was sitting on a 27 percent return. And it’s well behind the Nasdaq 100’s 26 percent plus return as well.

There’s less than three months to go in 2024. And utilities and essential services stocks are already set for their most profitable year this decade. In fact, just a normal seasonally strong Q4 performance would produce the Dow Jones Utility Average’s biggest gains since 2000. The DJUA’s 23.9 percent year-to-date gain puts it ahead of the S&P 500’s 20.8 percent, as well as the Nasdaq 100’s 18.4 percent. And utilities have so far outpaced rivals in the equity income universe as well, with the S&P REIT Index ahead just 12.9 percent and the Dow Jones Select Dividend Index (DVY) up 17.3 percent.

Big utility stocks stayed on a winning streak last month. The Dow Jones Utility Average is now up nearly 20 percent year-to-date. That’s about 10 percentage points better than the Big Tech stocks in the Nasdaq 100. And it’s out ahead of the S&P 500’s 14.5 percent. Despite the rally, utility stocks also remain historically under owned. The biggest in the S&P 500—NextEra Energy (NYSE: NEE)—has crept up to #52 from #55 a month ago. But it’s less than a third of a percentage point of the overall index. And you have to go down to 101th place to find another utility, Southern Company (NYSE: SO) at just 21 basis points of the index.

The Dow Jones Utility Average lagged the S&P 500 by 12.5 percentage points in the first half of 2024. But the first month or so of Q3 has witnessed a dramatic reversal of fortune: It’s utilities beating the broad market average by more than 14 points. And the DJUA is more than 18 points ahead of the Big Tech stocks in the Nasdaq 100. There are several reasons why this great rotation will continue. First, after roughly a year and a half of underperforming the broad market and Big Tech in particular, utility stocks are greatly under-owned by giant passively and actively managed investment portfolios that dominate the market.

Utility stocks had their moments in first half 2024. But with the Federal Reserve sticking to a “higher for longer” interest rate policy, it’s little surprise the Dow Jones Utility Average finished the first six months of the year well behind broader stock market averages, lagging the S&P 500 by 12.5 percentage points. Boosted mainly by strong performance of four stocks—Constellation Energy (NYSE: CEG), MDU Resources (NYSE: MDU), NextEra Energy (NYSE: NEE) and Vistra Corp (NYSE: VST)—the Conrad’s Utility Investor model portfolios did somewhat better.

All Utility Report Card companies have released calendar Q1 results and updated guidance, save a pair of floundering renewable energy companies flirting with bankruptcy: FuelCell Energy (NSDQ: FCEL) and SunPower (NSDQ: SPWR). For Portfolio companies, the verdict from later reporters’ results is the same as from the early returns. Number one, all of our companies are on track with the investment plans behind long-term earnings and dividend growth guidance.

Roughly 3 in 4 Utility Report Card companies have released their calendar Q1 results and updated guidance. Most of the rest should do so in the next week to 10 days. This issue’s company-by-company URC comments highlight what investors need to know about the results so far. That includes the 29 portfolio utilities issuing their numbers. And I’ll have my thoughts on the rest in next’s month’s issue, or beforehand for portfolio recommendations if action is needed.

To pivot or not to pivot—That’s the question the Federal Reserve continues to ponder in spring of 2024. Every stray data point on inflation seems to heighten the sense of inertia. And with benchmark interest rates indeed staying higher for longer, investors’ fear of debt and general disinterest in dividends persists. But there are signs sentiment is at last starting to shift. Changing allocations and a highly volatile quarterly payout makes the iShares Select Dividend ETF (NYSE: DVY) a poor proxy or substitute for a well-chosen portfolio of dividend stocks. But the ETF does follow the Dow Jones Select Dividend Index of 99 high yielding stocks and has definitively resumed the uptrend it began in late October.