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Bargain Stocks You Can Depend Upon

March 20, 2020

Every sector in the US stock market is down so far this quarter.

That has many investors asking where they can turn for dependable growth and income going forward and what they can buy when the market is down deeply.

One of the best defensible sectors that has sold off, although not as much as the S&P 500, is utilities.

Utilities, as measured by the S&P Utilities Index, are down 18.4% year to date compared to the S&P 500, which is down 25.2%.

And with higher dividend yields, utilities have only lost 17.8% in total return. The S&P 500 has a more average dividend, so its total return loss is 24.9%.

S&P Utilities Index (White) & S&P 500 Index (Orange) Total Returns—Source: Bloomberg Finance, L.P.

Granted, a loss is still a loss. But for me, it comes down to two things: Getting through the current crisis and what happens going forward.

Utilities are essential services and thus have a captive market of customers. And to make them more dependable, most utilities have both regulated and unregulated business units.

Regulated businesses are the core of utilities and must pass muster with public utilities commissions (PUCs) that set rates, set approved margins, capital budgets and other regulatory measures.

This may limit profits in local power or natural gas sales, but it provides a very safe and solid base. It’s the base that makes them dependable.

The unregulated side is the bonus. Wholesale market participation beyond the regulated service area provides added income and gains. And it will boom after we get past the current messes.

Yet, with the markets selling everything, facts and figures have been left behind. That means the valuations of quality utilities with upside have fallen significantly.

S&P Utilities Price/Earnings—Source: Bloomberg Finance, L.P.

The price to earnings (P/E) of the S&P Utilities Index has plunged by around a third over the past 90 days, from over 21 to a bargain level of 14.1.

This means you can buy in at bargain values and not just a cheaper price.

And similar valuation metrics, such as price to sales and price to book levels, are down significantly as well.

Meanwhile, the average dividend yield for the S&P Utilities has jumped from 2.8% on Feb. 14 to a current average of 3.8%. For income investors, that’s a significant jump in yield.

S&P Utilities Average Dividend Yield—Source: Bloomberg Finance, L.P.

So, you can buy now on the cheap in a sector that has plenty of dependable and defended assets, revenues and margins.

And then, as the economy and markets get past the current market messes, you get an extra kicker from the unregulated side of their businesses.

There are several individual utilities that I have inside the model portfolios of Profitable Investing, including NextEra Energy (NEE) and Duke Energy (DUK).

But if you want an easy way to start to nibble at this valuable, dependable market now, look to the Vanguard Utilities ETF (VPU), which I also have in my model portfolios.

The ETF has a dividend yielding a current 3.0%, which on an annualized basis is projected to actually yield 3.4%.

And even with the big drop in the general stock market, the longer-haul shows that this sector ETF delivers over time.

Its five-year return is 44.8%, for an average annual equivalent return of 7.7%.

Vanguard Utilities ETF (VPU) Total Return—Source: Bloomberg Finance, L.P.

Its bargain value and dependability as the crisis continues, including dividends and upside post-COVID-19, makes these companies and the Vanguard Utilities ETF great buys for growth and income right now.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life

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