Navigating Crazy Markets: Go For These Safe And Surging Stocks

Includes: AWK, FTS, NEE
by: The Dividend Guy

For a second year in a row, we feel fall will be challenging on the markets.

However, there are safe dividend stocks surging.

It's not too late to pick these three.

I personally find the stock market fascinating. Not too long ago, I reached a new peak value for my portfolio. It was during the week where several of my picks beat their earnings estimates and surged. I was lucky to have shares of all those companies in my portfolio:

Source: Ycharts.

But this happened in July. This looks like a decade ago when you look at the state of the market three weeks after, right? Concerns and uncertainties are at their peaks, and many investors think we will be having another difficult autumn on the market. In fact, it has already started.

If you have been following me for a while, you know that I don't believe in timing the market and in trying to figure out when the next bear, bull, or salmon market will happen (I bet you never heard of the salmon market, right? Ah!). In fact, my message is pretty clear:

I get that it could be difficult to stay invested when you see your portfolio value going away faster than an F1 in Monaco. For this reason, I'd like to share three companies that should be on your radar as they have proven to be not affected by the current slump. You will tell me it's too late and they are overvalued. I'll tell you, it's never too late to invest in great companies.

People need water

This pick has been featured on Dividend Growth Rock last January. Here's the investment thesis at that time:

…you are buying shares of a monopoly selling an essential product with repetitive purchases. With a highly fragmented industry and the urgent need for massive investment in water connections, a leader with the size of American Water Works will find a way to grow its business. Water needs will continue to increase as the population grows, and there are no substitutes for it. It is also a recession-proof business.

American Water Works (AWK) is an old water utility finding its roots back in 1886 but only went public in 2008 (what a year to start do an IPO!). Since then, AWK has been putting up some impressive numbers.

AWK is the largest investor-owned U.S. water and wastewater utility, serving approximately 3.4 million customers in 16 states. The company evolves in a highly fragmented market and its size makes acquisition the perfect hobby for management.

Like many utilities, AWK focused on regulated markets where it can justify rate increases following the massive investment. And believe me, the water infrastructure truly needs some investment!

Source: AWK fact sheet

Dividend perspectives

Forget about AWK yield for a second (it's roughly 1.60%) and look at this beauty… it's almost like a painting coming fresh out of Le Louvre:

Source: Ycharts

That's right, AWK has been showing consistent and massive dividend increase over the past decade. We are talking about a total increase of 138% or 9.06% CAGR over the past 10 years. The only reason why AWK shows such a low yield is because its share price surged even more (~550%). Oh, I wish I was in the "know" back in 2018!

AWK stellar dividend growth history makes it part of the elite group of Dividend Achievers; companies with over 10 years of consecutive dividend increases (you can find the full list here). Even better, AWK should be able to keep up with a high single-digit dividend growth policy for several years as its payout ratio is very stable around 60%.

Source: Ycharts

Why it's not too late to buy now

But Mike, why do you talk about a company that is overpriced already?

Overpriced, overvalued, over-whatever. Keep in mind that it's not because a stock surged that there is nothing left out of it. Imagine selling Apple (NASDAQ:AAPL) after its first 550% stock price jump? You would have left a lot behind.

AWK is far from being done growing. The company has a clear plan from 2019 through 2023 where it expects a 7-10% EPS CAGR and you can expect the dividend to follow. The current 5-year spending plan shows $8-8.6B in CAPEX. This will generate between 5% and 7% EPS growth over the next 4 years.

May 2019 investor presentation

While this is part of management's presentation, you can expect AWK being priced accordingly. Do you really think the company will stop growing in 5 years? Do you think the water infrastructure will be completely renewed and no more acquisition will be possible? Do you think the trade war or a recession will convince people to drink less water? For all those reasons, AWK is a keeper, even at today's price.

People need power

Once people are not thirsty anymore, the other thing they will need is power. If you are looking for safe stocks, the very first place you should look at are utilities, right? So, here we go for another pick in this sector: NextEra Energy (NEE). NEE self-proclaimed its business "the world leader in electricity generated from wind and solar." I think it's a catchy title, don't you think? But it's not just a title, it's the truth. As of 2018, NEE remains the world's top generator of wind and solar energy:

Source: NEE August investor presentation

Dividend perspectives:

I'm going to spoil the dividend section coming up next, but you must look at how NEE went through the latest financial crash:

Source: NEE August investor presentation

That's right: nothing happened during the latest recession. The utility continued to post growth and increase its dividend. Since interest rates stay at rock bottom, this is great opportunity for NextEra to boost its CAPEX… and its dividend!

Similar to AWK, NEE shows an impressive 10 years dividend streak. In fact, management has been even more generous than the water utility:

Source: Ycharts

If you are looking for more income, NEE also offers a high yield (~2.15%). While we all wish we picked NEE 10 years ago, it's never too late to make a good buy.

Why it's not too late to buy now

NextEra started its business based on subventions as wind and solar energy haven't been popular forever. After enjoying several years of government subsidies for green energy development, the economics now drive the show. Regulations are on their side and the appetite for more green projects will continue.

With the environmental trend being strong (and not close to slowdown), you can expect companies like NEE to keep showing strong growth. The company has built a strong expertise in a trendy sector.

NEE benefits from its investment in Florida Power & Light to surf on strong Floridian economic tailwinds. As both the economy and population is growing in this state, doors are wide open for more projects for the Sunshine State.

People need… Canadians!

After water and power, what people need is Canadians! I wanted to put some humor in this article, but I really think adding the most solid and strongest dividend growth Canadian company in your portfolio is a good move.

Fortis (FTS) owns and operates utility transmission and distribution assets in Canada and the United States, serving more than 2.5 million electricity and gas customers. The utility activities are well diversified across North America with a small portion in the Caribbean. U.S. represents roughly 65% of its earnings. Most importantly, Fortis is a symbol of stability and predictability as 99% of its business are based on regulated utility assets.

Source: FTS July investor presentation

Dividend perspectives:

While my first two picks were showing impressive share price growth and great dividend streak, Fortis is in another category. The company shows a smaller stock price jump and weaker dividend growth than AWK and NEE over the past decade.

Source: Ycharts

What is truly amazing about Fortis is its 45 dividend increase streak:

Source: FTS July investor presentation

The utility offers a nice yield around 3.50% and management continue to forecast a 6% dividend CAGR through 2023. I like when companies show motivation for growth (through acquisitions) and to reward shareholders at the same time.

Why it's not too late to buy now

If you are looking for stability of income and a perspective of growth, Fortis is probably your best pick among this short list. It is one of the rare companies offering growth and a relatively high yield.

The company has a five-year capital investment plan of approximately $14.5 billion for the period 2018 through 2022, up $1.5 billion from the prior year's plan. Chances are most of its acquisitions will happen south of our border.

Even after the stock surged by ~20% since the beginning of the year, Fortis still looks fairly valued from a dividend growth investing point of view. Using the dividend discount model with a dividend growth rate of 5.5-6% (in line with management's), we have a fair value of $56.53 CAD. FTS was "on sale" last year, but there is nothing wrong in acquiring shares of such a marvel at a fair price.

Input Descriptions for 15-Cell Matrix


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Please read the Dividend Discount Model limitations to fully understand my calculations.

Final Thought

I know many of you will tell me that those three companies are overpriced, and we should all wait for the next crash before we invest. Waiting is a losing game. I've read people telling to wait since 2013. When you buy the future, when you buy companies that will be there in 10+ years offering a great service to the population, you are making a sound investment.

If you are scared, the market will continue to be bumpy, those are relatively safe picks to consider, even at current valuation.

Disclosure: I do hold FTS and NEE in my DividendStocksRock portfolios.

Disclosure: I am/we are long NEE, AWK, FTS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance.