Daily Gains Letter

Avoid the Eurozone Mess: How to Profit Domestically
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By for Daily Gains Letter | Mar 28, 2013

280313_DL_clarkMost investors will consider utility stocks in saving for retirement, or when looking for regular stock market income while in retirement. This is a group that has a better track record on the stock market than you might think. Old economy stocks can still generate solid investment returns, even if they are well-established utilities.

The Dow Jones Utility Average has a good long-term track record of wealth creation, but it has not been without volatility. Clearly this is a group that is less volatile than many other stock market sectors and these stocks experience waves of enthusiasm from institutional investors.

Utility stocks are not for everyone. A lot of investors feel that they would be better off in faster-growing, brand-name companies that have long-term track records of paying dividends. But in terms of dividend yield, utility stocks are definitely a group that is worth looking into.

One of the standout utility stocks is The Southern Company (NYSE/SO). The stock has been a powerhouse wealth creator, with much less volatility than the rest of the group. The company’s long-term stock chart is featured below:

dl_03282013_image001Stock chart courtesy of www.StockCharts.com

In my estimation, Southern is one of the few utility stocks that combine excellent dividend payments with solid potential for further capital gains on the stock market. Considering Southern today, you might say that it is fully priced with a current price-to-earnings (P/E) ratio of approximately 17. But the dividend yield is 4.3%, which is very substantial in today’s environment. And you know that this business is still going to be there and that people are still going to be moving to the southern states. Those are good demographic trends. It makes the case for considering a position in a company like this, especially when it pulls back on the stock market.

Like all stocks, they experience periods of shifting investor enthusiasm. It happens with utility stocks and it’s the kind of thing that you have to keep an eye on in terms of your overall portfolio strategy.

For a blue-chip stock market portfolio, one or two utility stocks should be part of the mix. Along with a number of other potential dividend paying stocks, like brand-name consumer staples.

Readers know that I’m a big fan of dividend paying stocks and dividend reinvestment. I looked at the numbers, and I can tell you straight up that over time, dividend reinvestment, which allows you to purchase more shares thereby increasing the quarterly dividends you receive, creates a compounding effect that significantly improves your overall returns over time, compared to just a simple change in share price.

I’m also a big fan of keeping your stock market investments domestic. There is so much investment risk—the sovereign debt crisis in Europe, potential for war in the Middle East—that it almost doesn’t seem worth investing outside the U.S. market. Utility stocks are the perfect way to invest with capital preservation in mind, while keeping things domestic.

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