Three Safer Ways to Play the Rebound
05/06/2009 12:00 pm EST
Richard Band, editor of Profitable Investing, says investors who want to buy stocks again yet limit their risk should look to utilities, and he names three good ones.
Even if you’re skeptical of the market’s good intentions, you can tiptoe back into stocks by picking companies in steady, recession-resistant industries [and] focusing on equities that throw off generous dividend yields.
Utilities fit the bill perfectly. Some with very safe dividends are paying as much as 5%–6% up front. What’s more, while traders have rushed back into financials, retailers and other beaten-down stocks, [they] haven’t landed on the utilities yet. Most utility shares—electric and gas names, in particular—are only starting to make their move. So, you can still buy real value.
Let’s begin with two picks for income seekers. This pair will let you pull down a cash yield at least double that of a ten-year Treasury note (around 2.8% currently). Furthermore, I project that these companies will boost their dividends more or less in line with the cost of living for many years to come.
Parent of Atlanta Gas Light, AGL Resources (NYSE: AGL) distributes natural gas in Florida, Georgia, Maryland, New Jersey, Tennessee, and Virginia—states with generally faster population growth than the nation as a whole. Over the past five years, AGL has raised its dividend a handsome 53%, including the latest hike, announced in February. However, I expect the pace to slow in 2010–2012 as the company’s ambitious construction program drains off cash. Current yield: 6.3%.
A diversified giant with $16 billion of annual sales, Virginia-based Dominion Resources (NYSE: D) generates electricity and sends it to both wholesale and retail customers. In addition, the company operates an extensive natural gas pipeline network, as well as gas-gathering and storage facilities.
I like D’s well-rounded profile: regulated businesses that provide stability and unregulated businesses that deliver growth. Dividends have increased 31% over the past five years. Current yield: 5.8%. Buy AGL at $31 or less and D at $35 or less. (AGL closed at $31.50 Tuesday and D below $32—Editor.)
What if you’re more interested in capital gains? A few utility stocks may pack enough of a jolt to beat the [market] over the next year or so—wholesalers [that] derive most of their revenues from generating electricity and selling it to other utilities. As the industrial sector of the economy pulls out of its funk, earnings will pick up for the power wholesalers—and so will their stocks.
New Jersey-based Public Service Enterprise Group (NYSE: PEG) has skidded almost 40% [since November 2007], even though PEG posted record earnings per share in 2008. Go figure! Now that the recession/depression panic seems to be lifting, Wall Street analysts are cautiously bumping up their profit estimates. Another record seems possible in 2009; and, even if something should happen to upset the applecart, you’re buying the stock at a mere ten times last year’s earnings. The 4.5% dividend yield will also help put a floor under the share price. I’m targeting a total return of 30%–50% within a year. (It closed above $31 Tuesday—Editor.)