Investing Topics: Aggressive Income

Real industry trends don’t spontaneously occur. They’re forged on the ground by what companies are actually doing. And you spot them by focusing on individual companies’ results, and aggregating your findings.

Fourth quarter is usually a good time to hold utility stocks. But it’s only rarely a good time to buy, as prices often reach yearly highs.

When AES Corp (NYSE: AES) started doing business in the 1990s, it had a simple philosophy: Scour the globe for growing electricity demand and execute projects to meet it.

In the October issue, I added four stocks to the Conrad’s Utility Investor model portfolios.

Shrinking traditional business and hefty debt have made wireline phone companies a reliable income source for short sellers in recent years. The game, however, has moved on.

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.

Big picture themes always grab investing headlines. Success, however, flows from knowing what’s up with individual companies.

Regulated water utilities, for example, are on their face the very simplest and uniform of businesses. Yet so far in 2013, returns from the 10 companies I track in the Utility Report Card have ranged from a 26 percent gain to barely breaking even.

Investors are dumping dividend-paying stocks of strong companies due to misplaced fears about interest rate sensitivity. That’s opening up new opportunities in our favorite stocks, but be patient with prices.

It’s practically an article of faith among short sellers that betting against wireline phone companies is close to a sure thing.

That’s likely to prove disastrous, however, in the case of Consolidated Communications (NSDQ: CNSL), the only company in the sector not to cut its original dividend.