Stocks that provide safety and consistent income have been out of favor for many years. As an unprecedented bull run continued, many investors put all their eggs in the growth basket.
But now that many high-flying technology stocks have reversed course, the importance of slow-moving income stocks is gaining attention. That area of the market provides a hedge against times of extreme volatility and economic slowdown.
In this segment, we particularly like power and gas utilities due to the defensive nature of their businesses and their highly regulated revenue. In fact, utilities that provide power, gas and water to homes and offices don’t just pay dividends, but have, in most cases, regularly increased those payouts for decades.
Due to the changing market dynamics, we see investors increasingly embracing defensive/income stocks over growth/momentum plays as we enter in 2019. Here are our two top utility picks.
Duke Energy’s Plan Will Support Dividend Growth
With an annual dividend yield of 4.27% and $3.71 a share payout, Duke Energy (NYSE:DUK) is an attractive utility stock to own. Duke is a well-diversified power and gas utility serving some of the key markets in the U.S.
Duke Energy (DUK) – 1-Year Chart
Through its diversified power, gas and storage businesses, the utility plans to deliver between 4% and 6% annual dividend growth. We believe the utility is well-positioned to reward its long-term investors following a major restructuring in its portfolio in recent years.
That shakeup included selling carbon-based power assets and foreign operations, buying a natural gas utility and expanding its reach in renewable power. Today the utility’s business is largely driven by regulated assets and long-term contract businesses consisting of midstream pipelines and renewable power.
The company has a $37 billion development plan to run between 2018 and 2022. This level of spending is mainly targeted at regulated assets to support the company’s inflation-beating dividend growth.
After rising about 9% during the past three months, Duke stock has outperformed the major indices, showing that it’s receiving capital flows that are moving to less-risky assets as markets go through a period of downturn. Even with these gains, the utility’s 4%-plus dividend yield is attractive enough to make a long-term bet on this stock.
Enbridge Is Attractive Long Term After Recent Share Weakness
Calgary-based Enbridge (NYSE:ENB) is another utility stock that we find attractive due to its juicy 6.28% annual dividend yield that translates into $2.03-a-share payout.
Enbridge (ENB) – 1-Year Chart
Enbridge is the largest pipeline operator in North America, with its network handling 28% of the crude oil produced in the region. The company also moves about 22% of all natural gas consumed in the U.S., serving key supply basins and demand markets.
Due to this significant role in the region’s energy infrastructure, Enbridge stock is a relatively safe bet for the long run. The company’s strong cash-generating capability through a regulated rate structure also makes it a dependable stock to earn stable income during any recession or market downturn.
In addition, Enbridge has an excellent dividend history. Over the past 20 years, its payout has grown at an average compound annual growth rate of 11.7%.
Enbridge is expecting 10% growth in the annual dividend through 2020 as it undertakes $22 billion worth of development projects.
Enbridge stock is down about 18% this year as the company goes through a major restructuring, selling some non-core assets and cutting its high debt load.
Once done with this exercise, we see a major upside in this stock, most likely in the next 12 months.
For long-term investors, this is a good time to buy Enbridge as its valuations are compelling.
Investing in utility stocks looks boring with their slow growth and almost bond-type returns. But these defensive stocks are ideal for long-term investors whose objective is to earn steadily growing income. Duke and Enbridge fit the bill.