Seeking Alpha
Long/short equity, growth at reasonable price, value, deep value
Profile| Send Message|
( followers)  

A previous article highlighted a high-yield strategy in defensive sectors that, when tested over the past 10 years, has resulted in an annualized compound growth rate of over 10% when factoring in dividends. One consequence of targeting the higher yielding products is a heavy weighting toward MLPs.

I personally like MLPs, their structure of paying cash-flows that compare to high-yielding products, the defensive companies that operate under this structure such as pipelines that do not have profits directly tied into commodity prices, and the tax differences investors benefit from since they're only limited partners. Some, on the other hand, think MLPs are extremely overvalued. I am not here to argue such a point, but instead I propose a modification of the 'defensive strategy' that will remove MLPs.

Targeting Decent Yields That Are MLP-Free

The strategy is quite similar to my standard defensive one, with a couple of minor adjustments (no MLPs and a lowered yield requirement by 1%):

  • USA-based companies
  • 5-year dividend and EPS growth greater than 0
  • Utility Sector (as defined by Portfolio123)
  • Yield greater than 4%
  • Removal of MLPs

It is a simple strategy – but has it held up over time? We will perform back-testing using annual portfolio re-balancing. Once a year we examine the market to include any new companies meeting the above criteria and to remove companies from our portfolio that no longer do. On average there are 20 companies to invest in at any given time - less in extended bull markets and more following a bear market.

This results in a 3.64% compound annual growth rate as regards capital gains. The average dividend yield over the 10-plus years is pushing 5%. This results in a combined compound annual growth rate of 8.64% before considering taxation consequences from dividends and annual re-balancing. A robustness check that buys and holds for 12 months over 500 random entry points gives us some interesting statistics to chew on (brackets will be S&P 500 numbers):

  • Average 12 month capital gain = 4.22%(3.07%)
  • Average 12 month capital gain in up markets = 9.31%(14.06%)
  • Average 12 month capital gain in down markets = -6.91%(-20.91%)

What is interesting about the above statistics is the strength shown during down markets. Once you add in 5% average dividend yields this gets even more attractive (current average yield sits at 4.57%).

Defensive Stocks Making Today’s List

*all figures are derived from the Portfolio123 website. You should use due diligence and verify any figures before making an investment decision.

Ticker

Name

MktCap

Yield

(AGL)

AGL Resources Inc.

3057.32

4.62

(NYSE:ALE)

ALLETE, Inc.

1387.72

4.72

(NASDAQ:ARTNA)

Artesian Resources Corporation

152.75

4.35

(NYSE:ATO)

Atmos Energy Corporation

2940.45

4.24

(NYSE:AVA)

Avista Corporation

1382.62

4.63

(NYSE:BKH)

Black Hills Corporation

1196.28

4.82

(NYSE:CNP)

CenterPoint Energy, Inc.

7956.42

4.23

(NASDAQ:DGAS)

Delta Natural Gas Company, Inc.

114.26

4.16

(NYSE:DTE)

DTE Energy Company

8349.15

4.76

(NYSE:ED)

Consolidated Edison, Inc.

16534.47

4.25

(NYSE:ETR)

Entergy Corporation

11676.52

5.01

(NYSE:EXC)

Exelon Corporation

27740.15

5.01

(NYSE:LG)

The Laclede Group, Inc.

868.04

4.29

(NYSE:LNT)

Alliant Energy Corporation

4473.67

4.22

(NASDAQ:MSEX)

Middlesex Water Company

273.61

4.23

(NYSE:NEE)

NextEra Energy, Inc.

22132.45

4.2

(NYSE:NWE)

NorthWestern Corporation

1178.62

4.43

(NYSE:PCG)

PG&E Corporation

14960.85

4.94

(NYSE:PEG)

Public Service Enterprise Group Inc

15774.11

4.39

(NYSE:PGN)

Progress Energy, Inc.

15062.97

4.86

(NYSE:PNW)

Pinnacle West Capital Corporation

4877.13

4.7

(NYSE:PPL)

PPL Corporation

16429.46

4.93

(NYSE:SCG)

SCANA Corporation

5276.82

4.77

(NYSE:SO)

The Southern Company

36373.37

4.48

(NYSE:TE)

TECO Energy, Inc.

3760.82

4.93

(NYSE:UNS)

UniSource Energy Corp.

1286.75

4.82

(NYSE:WR)

Westar Energy, Inc.

3047.31

4.93

(NYSE:XEL)

Xcel Energy Inc.

12094.8

4.17

If you are looking for fairly consistent upwards action for a long-term average annual growth rate (before tax consequences) in the high single digits – and you strongly dislike MLPs – this might be a suitable strategy for you to consider. Or you may simply want to include the strongest of the above picks in with the Aggressive Dividend Defensive Strategy.

Source: A Defensive Income Portfolio, Sans MLPs, For Today's Volatile Market