Until the recent coronavirus interruption, this market was surging to new all-time highs on a regular basis with no end in sight. The trade issues got resolved, at least temporarily, and there was nothing left to stop the solid economy and low interest rates from driving the stock market into the stratosphere.
The S&P 500 returned a whopping 28.88% in 2019, one of the best years in decades. It was also continuing the upward trajectory in 2020. In the perpetual investor battle of emotions between greed and fear, greed was dominating. But was it really?
A look under the hood tells a somewhat different story. On the one hand, the best-performing stock market sector through the bull run has been Information Technology—no surprise there. That’s where all the growth and excitement is. But it is also somewhat misleading as the FAANG stock performance is having a massive influence on that sector. Just a handful of stocks continue to drive the sector and the indexes higher.
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But a look beyond Information Technology reveals a different side of this market. The next-best-performing market sectors over the past year are REITs and Utilities. These typically safe and high dividend-paying sectors were also top performers in 2018 and so far this year.
This is unusual. Typically, these safe and stodgy stocks outperform in down markets or flat markets. Rarely do they help propel the market to new highs. What’s going on?
Interest rates are a huge factor. These sectors behave like bonds in that rising interest rates lower the relative value of the dividend and REITs and Utilities struggle. Rising interest rates are often poison for these sectors. And rallies at the late stages of an economic cycle are usually accompanied by rising interest rates. But it’s different this time.
The Fed lowered the Fed Funds rate three times in 2019. And interest rates were already historically low. Now the benchmark rate is under 2%, compared to a historical average of over 5% at this point in the economic cycle. The dividends REITs and Utilities pay are still a good deal, and one of the few places to still get a decent income. And it doesn’t look like interest rates are going higher anytime soon. In fact, they might go lower.
Then there’s the safety issue. Utilities and REITs typically have more defensive businesses that tend to hold up well in a bad economy. They are probably the best sectors to be in when the market turns south. Sure, the market has been great lately. But investors realize that bull markets and recoveries always end, and this is now the oldest bull market and recovery in history.
Even when investors get optimistic and greedy, they still have one foot on safety. Nobody knows when the party will end and it is nice to own stocks built for a downturn, especially when they perform in an up market as well.
The one drawback is that after performing so well for so long, these sectors are somewhat expensive. But they still have great momentum, and the reasons that attract investors are unlikely to change anytime soon. There is still more room to run. Here are two stocks of note.
REITs and Utilities to Buy
NextEra Energy (NEE)
NextEra is the county’s largest utility by market cap. It’s really two utilities in one, combining a traditional regulated utility business with a vast alternative energy business. It provides both reliable cash flow and more earnings growth that a typical utility.
But that description doesn’t really do it justice. It combines perhaps the best regulated utility business in the country with the world’s largest alternative energy producer. Its Florida Power and Light business is the country’s largest regulated utility, operating in an extremely regulatory friendly environment that also has a growing population. The NextEra Energy Resources subsidiary is a world leader in nuclear, wind and solar energy.
It combines two of the very best businesses of its kind in the world. It’s like a utility stock on steroids, providing stable income with a solid level of earnings growth and a rising dividend and the market loves it. The stock has significantly outperformed both its utility peers and the overall market in every measurable period over the past 15 years, providing an average annual return of about 20% over the last 10.
The company has also targeted annual dividend hikes of 12% to 15% over the next several years. Most importantly, NEE performs while the market is booming and when the market struggles.
Crown Castle International (CCI)
Crown Castle International Corp. (CCI) is a Real Estate Investment Trust (REIT) that leases cellular technology infrastructure. More specifically, the company leases a portfolio of properties that currently includes 40,000 cell towers, 65,000 small cell towers and 70,000 miles of fiber optic cable primarily to the four largest wireless service providers.
It is an unusual REIT that is smack dab in the middle of the 5G revolution. 5G technology is a game changer that the U.S. government has prioritized. In fact, 5G has become the new arms race and the buildout will continue in haste, rain or shine.
Crown Castle is one of the leading companies in providing the necessary infrastructure to make the technology possible. I like it better than the other companies in the same business for two reasons: it specializes in small cells and it only operates in the U.S.
A 5G signal only travels about half a mile, compared to several miles for earlier generations. That means that small cell towers will be needed all over the place in order to increase the range and relieve congestion. And Crown Castle is the small tower king, providing more than any other company. And because it operates exclusively in the U.S., it won’t have international complications screwing up the story.
The REIT has produced reliable growth for several years and should continue to thrive. The stock is somewhat expensive at current levels but, given the huge demand and growth in its area, the company should continue to grow and perform at a high level for several years to come.
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