Defensive Utility Stocks Could Soar If Rates Stay Low and Volatility Jumps

Any way you look at it, the howls of disagreement from President Trump, Wall Street and the financial media over the increases in the federal funds rate, especially those put in by current Federal Reserve Chair Jerome Powell, seem to have worked, as it appears that at least for now, the Fed will remain on hold and focus on observing the incoming data.

One thing is for sure, interest rates as a whole have gone nowhere. In fact, the yield on benchmark 10-year Treasury is lower now than it was a year ago and down over 50 basis points, or one-half of 1%, since November. If you combine the drop in yields, with the potential for stock market dislocation and volatility, defensive stocks, especially safe yielding utility stocks, look very attractive.

A new research report from RBC notes that for the most part companies in their coverage universe for the sector reported solid fourth-quarter results. As we noted yesterday in a story on potential market dangers, defensive stocks may be a solid play for the rest of 2019.

We screened the RBC utility stocks for those that were rated Outperform and offered investors the highest yields. We found four that make good sense now for those not only looking for income but a degree of safety.

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CenterPoint Energy

RBC recently upgraded this top stock to Outperform. CenterPoint Energy Inc. (NYSE: CNP | CNP Price Prediction) is a diversified public utility holding company headquartered in Houston. Its utility segment provides electric distribution and transmission as well as natural gas distribution services to over 2.4 million electric and 3.4 million natural gas customers.

Besides its utility business, CenterPoint also consists of a competitive natural gas sales and services segment. Moreover, it currently holds 54% of outstanding shares of Enable Midstream Partners.

CenterPoint investors receive a 3.72% dividend. The RBC price target for the stock is $34, and the Wall Street consensus target is $30.85. The shares ended trading on Tuesday at $30.93.

Edison International

This top utility continues to raise its dividend on a steady basis but is somewhat riskier given the recent issues at PG&E. Edison International (NYSE: EIX) is the parent holding company of Southern California Edison, which is an investor-owned public utility primarily engaged in supplying and delivering electricity in Los Angeles and southern California.

The company’s service area contains a population of 15 million people, and Southern California Edison serves the population through approximately 5 million customer accounts. It also holds the Edison Energy subsidiary, which is a nonregulated business that operates across a range of related industries.

Shareholders receive a 4.00% dividend. RBC has a $68 price objective, while the consensus target is $66.50. The stock closed Tuesday at $61.34.

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Sempra Energy

This is another solid defensive play. Sempra Energy (NYSE: SRE) is a natural gas transmission and distribution company headquartered in San Diego. Company operations are divided into three segments. The California Utilities segment (South California Gas and San Diego Gas and Electric) distributes gas and electricity to approximately 25 million customers in Southern California. The other segments are Sempra US Gas & Power and Sempra International.

Recently, Sempra Energy replaced PG&E in the Dow Jones utility average. This should help keep liquidity solid in the name as index buyers will continue to add it as needed and would not sell unless it was removed.

Shareholders are paid a 3.25% dividend. The $126 RBC price objective is nearly in line with the $127 consensus target. The stock was last seen at $118.90.

Southern Company

This large-cap leader makes sense for very conservative accounts. The Southern Company (NYSE: SO) has four utility subsidiaries: Alabama Power, Georgia Power, Gulf Power (Florida) and Mississippi Power. Georgia and Alabama are the most significant and represent about 80% of earnings.

The utility businesses comprise 35,000 megawatts of power generation and 4.4 million customers. The nonregulated arm, Southern Power, owns and operates 7,600 megawatts of gas-fired power plants with the vast majority of the output signed up under long-term power contracts.

Shareholders receive a 4.88% dividend. RBC has a $52 price target. The consensus target is $48.85, and shares closed most recently at $49.22.

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These are four top dividend utility stocks that should not be avoided as the threat of rising interest rates looks muted this year. The 30-year Treasury yields only 3%, so these are all better income investments today. For those worried about the stock market, it definitely makes sense to move to these super-safe sector leaders.