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Dividend sectors of the U.S. market
The Utilities and Real Estate (REITs) sectors, which are typically dividend stocks, will be of interest to investors. While they may favor these sectors solely because of sustained dividends, different factors drive their dynamics.
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Power sector: solid returns, defensive nature
The power sector has a 3.0% share of the S&P 500 Index. The recommendation is “On par with the market.” From the beginning of the year through November, the sector is up 2% versus a 14% decline in the S&P 500. The average dividend yield for electric utilities is 3.2%, compared to 1.6% for securities in the S&P 500.
Yields are expected to be higher than the market and earnings are expected to grow steadily. Cumulative annual returns through share growth and dividend payments for the sector could be 5-9%. The sector offers investors solid total returns and securities that are protective in times of market volatility.
Gas business is in focus
Certain companies in the sector have had an opportunity to increase revenues and profits amid global trends in international trade in 2022 and increased demand for gas outside the U.S. We highlight as favorites companies whose business is directly related to gas.
For example, Sempra Energy, an infrastructure company in the electric power sector, owns LNG assets. The company has projects that liquefy gas and send it for export from the U.S. in tankers. Another favorite in the sector is DTE Energy, one of the leaders in gas transportation and storage in North America.
Real Estate: Diversifying the Business
The real estate sector has a 2.7% share of the S&P 500. The recommendation is “On par with the market.” Real estate investment trusts (REITs) have a dividend yield of 4.15% versus 1.6% for securities in the S&P 500.
The average potential EPS growth for REITs is 5-7%. The sector is characterized by a high diversification of properties: offices, apartments, retail stores, storage warehouses, medical office space, and so on. The REIT growth potential depends on the dynamics of the businesses for which the property is intended.
High dividend yields, dependence on the macro environment. Although the real estate sector’s dividend yield is well above the market average, which represents some margin of safety in stock valuations, the sector is dependent on macroeconomic conditions and interest rate levels. With the Fed tightening monetary policy, it has lagged behind the market index.
Favorites among power sector and real estate stocks
Sempra Energy is an energy holding company. Gas accounts for about 61% of revenues. Its main assets in the regulated rate market are San Diego Gas & Electric (3.7 million customers in the gas and electric segments) and Southern California Gas (22 million customers in the gas segment).
DTE Energy
DTE Energy is a diversified energy company. Operating divisions include Detroit Edison (electric power, 2.3 million customers); MichCon, MichCon (gas, 1.3 million customers), and thermal power, industrial projects, fuel transportation and distribution.
AvalonBay
AvalonBay Communities is a real estate investment fund with a focus on business-class apartments. It now manages 293 properties with about 88,000 apartments in affluent neighborhoods. The company’s business is concentrated in the New England, New York/New Jersey, and California regions.
