More advisors adding utilities to juice up client portfolios
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More advisors adding utilities to juice up client portfolios

More advisors adding utilities to juice up client portfolios

By
Gregg Greenberg
|
August 15, 2024

Apparently more and more financial advisors are turning up the juice.

The Utilities Select Sector SPDR ETF (Ticker:XLU) has surged more than 20 percent in the past six months, far outperforming every other sector in the S&P 500 over the same period. By comparison, the Technology Select Sector SPDR ETF (Ticker: XLK) has risen 7.1 percent, while the entire SPDR S&P 500 ETF Trust (Ticker: SPY) is up 9.6 percent in the past half year.

Sure, the yield on the XLU, which owns healthy chunks of star performers NextEra Energy (Ticker: NEE) and the Southern Company (Ticker: SO), is a robust 3 percent at a time when bond yields are collapsing in hope of multiple rate cuts. But there’s more to the bullish case for power generators than a steady payout, according to Aaron Dunn, co-head of value equity at Morgan Stanley Investment Management.

“You have this inflection in power demand, whether it be data center driven or other things driving power demand in the US like EVs,” said Dunn. “For two decades, you’ve had flat power demand that was driven by the efficiency of your appliances at home. Today we have this inflection and we see a doubling of power demand increases over the next 10-plus years.”

Dunn makes the comparison to consumer staples, another traditionally defensive sector, which he calls “very challenged from pricing and volume perspective.”

“They’re defensive, but I would prefer to own something where I think we’re getting mid-single digit to upper-single digit growth in earnings and a yield that now sort of approximates the ten-year yield,” said Dunn.

Robin W. Haire, LPL Financial Advisor and president of Haire Wealth Management, says clients relate to paying their light, gas, and water bills monthly. Furthermore, they realize they have to pay all three no matter the business cycle.

“But what they might not realize is that the utility sector can be a defensive sector in times of uncertainty and slower economic growth,” said Haire. “We share that if you own the utility sector you get part of that ‘monthly electric bill back in a dividend check’ and this really resonates with our retiree clients.”

Similarly, Adam Dean, wealth manager at Savvy Advisors says utilities are crucial in investment portfolios because they tend to be companies that are in constant demand regardless of economic conditions.

“Companies in this sector historically have had better stability, predictable cash flow, and they offer higher dividend yields,” said Dean. “They also don’t experience market volatility compared to other sectors, and offer inflation protection while being viewed as a defensive investment.”

Added Dean: “Utilities are often viewed as slow-growing, but investing in renewable energy and infrastructure upgrades provides growth opportunities inside the sector. The transition to cleaner energy sources has been driving significant capital investment which can then be used as a good long-term investment opportunity based on the client’s goals.”

Brian Glenn, chief investment officer at Premier Path Wealth Partners, currently maintains a slightly overweight utilities position relative to the market. Specifically, he owns the Utilities Select Sector SPDR ETF and the iShares Core Dividend Growth ETF (Ticker:DGRO) which executes a dividend growth factor bias that results in a larger utilities weighting versus the S&P 500.

“We think it’s less surprising how the utilities sector has performed given where we are in the market cycle. The utilities sector began the year with a dividend yield that was about 200 bps higher than the S&P 500. The sector performs very well in ‘slowdown’ periods, owing to high dividend yields and prospects for falling interest rates,” said Glenn.

Elsewhere, Christopher P. Davis of Hudson Value Partners, says he likes utilities with a “hard catalyst,” or something that can help the company trade on its own merits not just on rates. For example, he holds MDU Resources Group (Ticker: MDU) which is a North Dakota based utility that has outpaced the S&P 500 and XLU year-to-date.

“The firm intends to spin off its construction services division called Everus later this year,” said Davis. “MDU’s previous spin Knife-River Corp (KNF) in the aggregates business has been successful as an independent firm.”

Meanwhile, Brian Storey, deputy CIO for Destinations Portfolios at Brinker Capital Investments, says he has been seeing greater interest in utilities by many of the active managers he utilizes in his portfolios. Specifically, he has seen the greatest interest in those utilities selling into the wholesale market and those focused on nuclear generation.

“We do think that the combination of increased electricity demand from data centers and the tailwind that is likely to benefit utilities if we do see lower interest rates in the quarters ahead creates an attractive backdrop for utilities to continue delivering compelling returns,” said Storey. “At the same time, there are risks to investing in utilities just like all other investments, and it is important for investors to understand the different risk profiles of those utilities primarily focused on regulated versus deregulated electricity markets.”

All that said, Cyrus Amini, chief investment officer at Helium Advisors, is not overweighting utilities in his client portfolios due to the still high-rate environment. However, if rates do start to decline, Amini says they will ubecome more attractive due to their dividend profiles.

“When you pair the dividends with higher aggregate demand for their services in the future, utilities are evolving into an opportunity for longer-term investment,” said Amini.

Related Topics: Morgan Stanley Investment Management

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Adam Dean is an investment adviser representative with Savvy Advisors, Inc. (“Savvy Advisors”). Savvy Advisors is an SEC registered investment advisor. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy.