Utilities May Not Be A Safe Harbor

Some sector ETFs are vulnerable to dividend cuts.

Utilities are supposed to be defensive stocks. Risk-averse investors especially rely upon utility stocks when the economy sinks into recession. Much of the appeal stems from the stocks’ high dividend payouts. There’s nothing like a regular income stream to soften the blows to one’s portfolio in precarious times.

Not all utility dividends are created equal, though. Some are more secure than others. Thanks to the good folks at Reality Shares, the purveyors of an exchange-traded fund family based on its proprietary DIVCON rating system, we can gauge which dividends appear secure and seem wonky. Looking forward, DIVCON ranks stocks on the basis of the issuers’ health and the likelihood of changes in the companies’ dividend policies.

There are five utilities that made the most recent DIVCON list as “most likely to decrease or cut their dividends within the next 12 months:”

  • Avangrid, Inc. (NYSE: AGR), a Connecticut-based holding company that owns eight electric and natural gas utilities serving over 3 million customers in New York and New England.
  • NRG Energy, Inc. (NYSE: NRG) provides electricity generated from natural gas, coal, nuclear and alternative sources for nearly 3 million users in the New Jersey market.
  • Aside from supplying the island chain with electricity, Hawaiian Electric Industries, Inc. (NYSE: HE) also has exposure to the financial sector through its ownership of a savings bank.
  • A natural gas and electricity supplier, NiSource Inc. (NYSE: NI) operates in Ohio, Pennsylvania, Virginia, Massachusetts, Maryland and Indiana.
  • Headquartered in Akron Ohio, FirstEnergy Corp. (NYSE: FE) generates and transmits electricity to 6 million customers in six Mid-Atlantic states.

Investors have been aggressive buyers of these five stocks over the past two years. As you can see in the chart below, an equal-weighted portfolio of these issues would have significantly outdone the large-cap sector represented by the SPDR S&P 500 ETF (NYSE Arca: SPY) and the S&P’s utility sector proxied by the Utilities Select Sector SPDR (NYSE Arca: XLU).

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