Utilities for Unfixed Income

Monday, September 28, 2020

Utilities for Unfixed Income

Utilities offer attractive "unfixed" income—high dividend yields, with prospects for growth.

  The spread between the utility sector dividend yield versus 10-year Treasury yield remains in the 99th percentile relative to the past 25 years. Why do we view today’s environment as a unique valuation opportunity in utilities?  

With renewed volatility in the markets, it may be a good time to think about an allocation to utilities.

What may come as a surprise to investors is that the traditionally-defensive utilities sector has significantly lagged S&P 500 Index year-to-date*. Utilities have underperformed by over -11% as a handful of mega-cap stocks have driven the broad market higher.

Description

As of August 31, 2020
Source: Bloomberg; S&P; Miller/Howard Research & Analysis

We view today’s environment as a unique valuation opportunity in utilities.

The dividend yield for utilities stocks relative to the US 10-year Treasury yield peaked on March 23, 2020 during the COVID-19 market panic. The spread remains near historic highs, even six months later. Today’s spread between the utility sector dividend yield versus 10-year Treasury yield remains in the 99th percentile relative to the past 25 years.

Description

As of August 31, 2020
Source: Federal Reserve Bank of St. Louis

This is largely driven by one half of the equation: the 10-year Treasury is near historic lows. To frame it from an income-perspective, a client with $1 million in savings invested in the 10-year Treasury can expect an annual income of roughly $7,000.** Looking at the Miller/Howard Utilities Plus portfolio, with a current dividend yield of 3.6%, that same $1 million could hypothetically produce an annual income of $36,000 in year one.***

Utilities are, traditionally, a more stable source of income for bond investors who are tired of meager income. With a high current yield—5-times the 10-year Treasury yield—and a strong track record of income growth, utilities can be a powerful alternative to fixed income.***

Sources: Bloomberg, S&P 500 Utilities Index, S&P 500 Index, Federal Reserve Bank of St. Louis, Miller/Howard Research & Analysis
* As of September 21, 2020
** Source: Federal Reserve Bank of St. Louis Economic Research - 10-Year Treasury Constant Maturity Rate (DGS10), as of August 31, 2020
*** Based on the Miller/Howard Utilities Plus portfolio dividend yield as of August 31, 2020


Bryan J. Spratt, CFA, focuses on utilities, telecommunications, and energy stocks. Before joining Miller/Howard in 2004, Bryan worked as an analyst and portfolio manager in investment subsidiaries of Comerica Bank and Munder Capital Management, where he was a member of the energy and power team. Prior to that, Bryan was at Banc One Investment Advisors and the One Group Funds where he was responsible for utilities and telecom for the value team. He graduated summa cum laude from Spring Arbor College with a BA in Economics/Computer Science.

Adam Fackler, CFA, focuses on utilities, telecommunications, and midstream energy including master limited partnerships (MLPs). Prior to joining Miller/Howard in 2016, Adam spent 10 years at Rodman & Redshaw and KLR Group, focusing on MLPs, and at MLV & Co., covering exploration & production companies and MLPs. Adam holds a BS in Business Administration with a minor in Economics from Bucknell University. 

INVESTMENT PRODUCTS: ARE NOT FDIC INSURED - MAY LOSE VALUE - ARE NOT BANK GUARANTEED

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction.

The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be appropriate for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such appropriateness. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance.

Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Past performance does not guarantee future results.

© 2020 Miller/Howard Investments.

DISCLOSURE

INVESTMENT PRODUCTS: ARE NOT FDIC INSURED - MAY LOSE VALUE - ARE NOT BANK GUARANTEED

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction.

The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be appropriate for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such appropriateness. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance.

Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Past performance does not guarantee future results.

© 2020 Miller/Howard Investments.