Michael Cannivet, CFA, president of Silverlight Asset Management, an investment advisory in Newport Beach, California. He specializes in portfolios using sectors such as utilities and REITs. SilverlightInvest.com
Bottom Line: These investments can shine when economic growth weakens.
Many conservative investors have turned their backs on utility stocks and real estate investment trusts (REITs). That’s because these investments’ steady dividends—normally their attractive calling card—become less attractive as interest rates rise on competing investments, such as bonds. But avoiding utilities and REITs could be a mistake now.
Yields on utility stocks and REITs recently ranged from 3% to 5.5%, versus around 3.7% for intermediate-term corporate bonds. So their yields are still mostly higher. What’s more, their share prices are likely to outperform the S&P 500 because they tend to have steady earnings even when economic growth slows, which is likely this year. And because of that economic weakening, interest rates are unlikely to rise much more if at all. For all these reasons, utility stocks were the best-performing sector of the S&P 500 in the fourth quarter of 2018, followed by REITs.
Utility stocks and REITs that had positive returns last year and that offer attractive yields…
Ventas (VTR) is a REIT specializing in health care, with about 1,200 properties including senior housing facilities and medical office buildings whose tenants run profitable businesses and sign long-term contracts with annual rent increases. Recent yield: 5.24%.
Pinnacle West Capital (PNW) is a regulated utility in Arizona providing electric service to 1.2 million customers including those in the fast-growing city of Phoenix. It has one of the strongest balance sheets in the industry. Recent yield: 3.45%.
Exelon (EXC) serves more customers than any other utility, with 10 million power and gas customers in six Midwest and mid-Atlantic states. It produces 20% of all US nuclear power and 5% of all US electricity. Recent yield: 3%.