Safety Plays: Utilities, Telecom and Health

02/10/2017 9:00 am EST

Focus: STOCKS

Richard Stavros

Analyst, Global Income Edge, Utility Forecaster and Personal Finance

Income investors will need to buckle up and regularly check their pulse in 2017. We'll see market gyrations as investors react to new Trump policies and Federal Reserve rate hikes while navigating various overvalued stock and bond markets, cautions Richard Stavros, editor of Investing Daily's Personal Finance.

I have repositioned it to protect investors against what looks like an overvalued stock market. The core of the portfolio is now large infrastructure industries such as utilities, as well as globally diversified investments in telecoms and healthcare. I believe these will deliver superior income even as rates rise.

Among utilities, National Grid (NGG) is my best pick for 2017, as it's an almost perfect hedge against uncertainty. It's insulated from changes in government interest rates. It can be both an inflation hedge and a play on a strong dollar.

Because National Grid operates in both the U.S. and the U.K., it's somewhat insulated from restrictive U.S. trade policies, and its 5% dividend yield is still far ahead of government rates.

With a dividend yield of 4.8%, AT&T (T) will continue to be an attractive income investment whether or not the merger with Time Warner (TWX) happens. AT&T recently completed other deals that have increased earnings and strengthened dividend safety.

Profits, which had been rising 8% to 9% the past few years, should grow at double-digit rates over the next few years, around 10% to nearly 12%, according to S&P Global Market Intelligence. That's an impressive feat for a company with a $226 billion market cap.

In keeping with our focus on global diversification and given the increased possibility of inflation, we also like telecom juggernaut Vodafone (VOD). It offers a 6% dividend yield, global diversification and stability.

On the healthcare front, as we reported last issue, calls to rein in drug prices haven't hurt the business of our portfolio companies, all large pharmaceuticals.

Two of our top holdings, GlaxoSmithKline (GSK) and Merck (MRK) have seen substantial improvement in earnings as new drugs start to build market share. Glaxo and Merck offer dividend yields of 4.71% and 3.08%, respectively.

We believe drug-pricing concerns are overdone for three reasons. The global footprint of these companies gives them access to growing markets; retiring baby boomers will keep demand rising; and healthcare companies are making contingency plans in case they have to charge less for medications.

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