The market rallied on the heels of the latest Fed meeting when they opted to signal that three rate cuts are still on the table. But the problem is that inflation is sticky and the Fed knows that historically inflation like this has come right back when the Fed takes its foot off the gas. I don’t believe the Fed will be as accommodating with rate cuts as the market currently expects, unless of course the economy tanks.
The rest of the year could be viewed in either a positive or negative way. You could say that the market will either deal with continued high interest rates or a tanking economy, both of which could be bad for stocks. Or you could take the view that if interest rates remain high, it means the economy is strong. If the economy does turn south, falling interest rates will compensate the market. Either of those scenarios could be good for stocks.
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At the same time, inflation could accelerate and send rates even higher, or the economy could fall into a recession. While those things are certainly possibilities, the middle ground is more likely, at least for the foreseeable future.
But with uncertainty still high, it pays to find all-weather income stocks that can endure and perhaps thrive in such an environment. Here are two.
All-Weather Income Stock #1: ONEOK, Inc. (OKE)
Yield 5%
ONEOK is a large U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supply in the Rocky Mountains, midcontinent, and Permian regions in key market centers, and has an extensive network of natural gas gathering, processing, storage and transportation assets. A whopping 10% of U.S. natural gas production uses ONEOK’s infrastructure.
Here are some things to like about the company and stock:
- Investment-grade rated debt
- 85% of earnings fee-based
- 26 years of stable and growing dividends
- C corporation structure (generate a 1099 and not a K-1)
Earnings are resilient because ONEOK operates in the best segments and is well positioned in the high-growth shale regions. Natural gas is a rapidly growing fuel source that is much cleaner burning than oil or coal. NGL is by far the fastest-growing fossil fuel source. Midstream energy is a solid income-generating industry right now. But ONEOK is solid all the time.
The stock should be a keeper during times of inflation. Although revenues are overwhelmingly fee-based and are about merely collecting tolls for the transportation and storage of natural gas assets, the stock tends to move along with the energy sector, which is price-dependent. In addition, ONEOK operates mostly under long-term contracts that have automatic inflation adjustments built in. The company also has recession resilience.
The desirability and resilience of natural gas was beautifully illustrated by the performance of the asset during the pandemic. ONEOK’s natural gas and NGL volumes continued to grow in 2020 despite it being one of the worst years ever for the energy industry. The company posted earnings growth (as reflected in adjusted EBITDA) for 2020 and throughout the lockdowns in 2021. In addition, demand for natural gas liquids (which accounts for 60% of earnings) is expected to increase more than 20% per year until 2040.
There are some great things about the dividend, aside from the stellar 5% yield. For one, it is a regular dividend and doesn’t generate a K-1 at tax time, like most midstream energy companies that are Master Limited Partnerships. It also qualifies for the maximum 15% tax. OKE has also grown the dividend payout by an average of 13% per year for the past 21 years.
All-Weather Income Stock #2: NextEra Energy, Inc. (NEE)
Yield 3.3%
Utility stocks are well-suited for recession. The sector is the most defensive on the market as earnings are virtually immune to economic cycles. Stocks also pay high dividends and typically hold up very well in down markets.
NextEra Energy provides all those advantages plus exposure to the fast-growing and highly sought-after alternative energy market. It is the world’s largest utility, a monster with about $16 billion in annual revenue and a $126 billion market capitalization.
How can that be? It’s because it isn’t a regular utility.
NEE is two companies in one. It owns Florida Power and Light Company, which is one of the very best regulated utilities in the country, accounting for about 55% of revenues. It also owns NextEra Energy Resources, the world’s largest generator of renewable energy from wind and solar and a world leader in battery storage. It accounts for about 45% or earnings and provides a higher level of growth.
Investors love it because they get the safety and income of a utility and still get great growth and capital appreciation. It’s the best of both worlds.
With NEE you get a solid defense utility that can weather a recession with solid returns. You also get a growth aspect from clean energy and the desirability as a conservative play on the trend - a perfect all-weather income stock.
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