These 5 dividend titles will profit from falling interest rates in 2024
Which stocks will do well in 2024? This question is on the minds of the vast majority of investors towards the end of the year. And while no one knows the future, there are indicators that can give us a clue. These 5 stocks from the utilities sector had a tough year in 2023, which could mean a great opportunity to get in.
The utilities segment, or public utilities, is down about 10% year-to-date, while the broad market index, by contrast, is up 23% this year. Huge difference.
The reason? The Fed's move, as it were.
Rising interest rates have put utilities under pressure since the start of last year, exposing companies to higher refinancing costs and making their dividends less attractive relative to Treasuries. Utilities act as a proxy for the bond market and tend to see prices fall when rates rise.
But now utilities are enjoying a recovery - up 2% in the past month - as 10-year Treasury yields retreat. The benchmark yield is now at around 3.9%, down sharply from October's highs when it broke the 5% mark.
"It's been a historically bad year for utilities in 2023, but we think there are some signs of a promising future, " said Travis Miller, energy and utilities strategist at Morningstar. "We think investors finally have a chance to buy utilities with dividend yields - and what's more, utilities today have stronger balance sheets and stronger growth prospects than we've seen in the last decade," he added.
2024 will be about something else
The "higher for longer" theme for Federal Reserve interest rate policy this year has logically challenged the attractiveness of utilities among investors. Recently, however, the yields have started to show signs of tightening, and the Fed signaled last week that it expects a triple rate cut next year.
"We are seeing a recent surge in interest in the sector and see the stabilizing rate outlook as a key catalyst for multiple expansion," JPMorgan analyst Jeremy Tonet said in a report last week. He noted that moderating inflation should also help the sector.
Finally, much of the pain associated with higher rates has already been "priced in" in equities, said John Baldi, portfolio manager at ClearBridge Investments and co-manager of the Dividend Strategy Fund (SOPAX). He noted that utilities' earnings expectations for 2024 haven't changed much and long-term interest rates are causing the sector to underperform.
"If rates fall, there is an opportunity to reassess the sector more in line with its historical relative valuation as the sector has effectively front-loaded some of the pain associated with higher rates," Baldi said.
5 companies for 2024
To that end, Baldi's fund added exposure to two utilities this year, Sempra Energy $SRE+0.1% and Edison International $EIX-0.5%, citing reasonable valuations and attractive yields.
Sempra operates in California and Texas and its stock offers a dividend yield of 3.2%. UBS rates the stock a buy and does not expect Sempra to have to sell shares in 2024. The stock is down more than 2% in 2023.
Edison International is based in California and has a yield of 4.5%. The stock is up nearly 10% this year.
Sempra
SRE
Morningstar's Miller named Indiana-based NiSource $NI-0.1% as one of his picks. "We don't think the market is pricing in their earnings growth potential over the next five years," he said. NiSource pays a dividend yield of 3.8% and provides gas and electricity distribution in the Midwest. Shares are down 3% in 2023.
JPMorgan's Tonet also called NiSource a top pick for 2024, citing "favorable thematic characteristics of the stock with an outlook that already [reflects] inflation and high interest rates." The bank also pointed to NiSource's 6% to 8% annual earnings per share growth.
"Overall, there are few names in our coverage that offer such a balance of quality and growth, which we expect will stand out in the new buying interest in this area following the 'sell the sector' paradigm in 2023," Tonet said.
Entergy $ETR-0.4% is another company that Miller likes, as is North Carolina-based Duke Energy $DUK-1.5%.
New Orleans-based Entergy "trades at a discount to the rest of the group and pays a yield well over 4%, which is a very attractive combination for investors," Miller said.
"We think ETR has one of the most compelling stories in the sector - the expansion, decarbonization and electrification of the company's industrial customer base on the Gulf Coast, " said analyst Neil Kalton of Wells Fargo.
The stock loses nearly 10% in 2023, but the dividend yield is a nice 4.5%.
▪️◾◼️◾▪️
You will find a lot of inspiration on Bulios, but the final stock selection and portfolio construction is of course up to you, so always do a thorough analysis of your own. Thepractical tools within the Bulios Blackmembership are always at your disposal.
Source: Yahoo Finance, CNBC, Bloomberg, AI