Investing Topics: Investment Strategy

On July 14-15, the US Energy Information Administration held its annual conference in Washington, D.C. Speakers ranged from government analysts and statisticians, politicians and regulators to high-level industry consultants and luminaries like author Daniel Yergin. My colleague Elliott Gue and I attended to uncover investment opportunities obscured by faulty conventional wisdom. Here's our take.

Since the beginning of May, 80 percent of the companies in our model Portfolios have hit 52-week highs. And the rest are a good day’s trading from this achievement. Our Aggressive Income Portfolio has delivered an average return of 27.5 percent since its inception, roughly doubling the 13.7 percent gain posted by the Dow Jones Utilities Average over equivalent holding periods. Meanwhile, the picks in our Conservative Income Portfolio have generated an average return of 13.4 percent, slightly lagging the benchmark index’s 14 percent gain.

But new risks have emerged that bear monitoring. A growing focus on allowance for funds used during construction (AFDUC) has identified some utilities that may be at risk of potential write-downs. Meanwhile, others find themselves in the crosshairs of the Obama administration’s aggressive environmental policies.

The greatest danger to most of the 207 stocks in my Utility Report Card comes when investors’ expectations rise along with prices. That’s why it’s critical to stick with my buy targets, which are based on long-run value—not near-term momentum.

Be patient when a stock you want to buy moves above my buy target. I will raise those targets when potential returns rise and risks diminish. Until then, focus your firepower on the stocks highlighted in this issue.

Our Portfolios are a mixed bag in terms of their underlying businesses and growth drivers. But our holdings are on track for solid earnings and dividend growth over the long haul. These names don’t respond uniformly to changing business conditions or short-term market moves so diversification is key to reduce volatility.

Dividend-paying stocks aren’t bond substitutes and never will be. Any investor who has sold these equities because of rising interest rates has lost big over the past 22 years. Those who do so now are playing with the same fire and, inevitably, will be badly burned.

The National Association of Publicly Traded Partnerships' annual MLP Investor Conference is just around the corner.

By and large, our favorite utilities and other essential-service providers have announced solid first-quarter results, while the market’s low expectations provides a blessing in disguise.

The aftermath of a dividend cut is always an emotional time, especially for investors who own the stock in question. But if you can keep a level head and evaluate the company’s proposed turnaround effort, you can find deep-value plays poised for big returns—a rarity in a five-year-old bull market.

Savvy investors who buy the best utility stocks at the best prices will outperform the index huggers.

The Conrad's Utility Investor Portfolios have beaten benchmark interest rates since I launched on July 31, 2013 - a clear sign my recommended dividend-paying stocks follow earnings, not interest rates. And with another round of earnings due later this month, all of our companies are set to prove their worth to investors again.

Janet Yellen acknowledged that the Fed might start to raise interest rates six months after phasing out its bond-buying program toward the end of 2014. Take advantage of the selloff in dividend-paying stocks to add high-quality names.