On Monday, the S&P 500 was down 7% just minutes after the opening bell, triggering a “circuit breaker” that paused trading for 15 minutes. This is the first time this has happened. The Dow fell a record 2,014 points that day. The record stood for just three days until Thursday saw a 10% decline. Again, circuit breakers put a pause on trading. Then on Friday, after governments around the world stated they would take action to provide support for their economies, the major U.S. indexes saw the largest rally since 2008.
Investors can be forgiven if they are feeling the whiplash of the markets over the past few weeks. Again and again, 1,000+ point drops seem to be followed by 1,000+ point gains in the Dow Jones Industrial Average. The other indexes are experiencing the same rapid swings up and down.
Investors with a long-term horizon and many years to retirement should do their best not to be paralyzed with fear. Instead, I believe we should study legendary investor Warren Buffet, who has done quite well following his own advice to be “greedy when others are fearful.”
The sudden declines in almost every stock can be a stomach punch, especially after investors have gotten complacent with stocks seeming to make all-time highs every day. There are names out there that have been beaten down too much, even though they offer income and reside in a sector that should hold up better even with increased market volatility.
Two stocks that I think are appealing right now for these reasons are NextEra Energy Inc. (NEE, Financial) and Verizon Communications (VZ, Financial).
NextEra Energy Inc
I penned an article last week on three high-yield utility stocks that I thought looked like a good investment in the current market. Utilities are popular with income investors because they are usually better able to navigating a recession, as costumers prioritize paying the electricity and gas bills. They also tend to throw off a high level of income.
One other name that I like in this sector is NextEra Energy. NextEra Energy operates three segments, two of which are the regulated utilities "Florida Power & Light" and "Gulf Power." These two segments serve approximately 5.5 million customers in Florida and provide two-thirds of earnings to the company. The third segment of the business, NextEra Energy Resources, is the largest generator of wind and solar energy found anywhere in the world.
While having a vast operational footprint in one of the largest states in the union is good for the regulated side of the company, it is NextEra Energy’s renewable energy business that I find most appealing. Renewable energy is becoming a bigger business around the world, and NextEra Energy’s leadership position in this area will be a driver of growth in the coming years. For example, the utility company added more than 5,800 megawatts to its backlog during 2019. A year earlier, the entire backlog was just 7,400 megawatts, showing how quickly renewable energy is taking off.
In a steep market wide decline, I become very interested in stocks when they are more than 20% off the 52-week high. Shares of NextEra Energy lost 13% last week alone and are down nearly 22% from the 52-week high. That has helped the stock’s yield reach 2.7%, higher than the 2.2% average yield for the S&P 500. This is on the lower side for a utility company, but shares of NextEra Energy have more than doubled over the last five years even when including the recent decline.
NextEra Energy has also increased its dividend for 26 consecutive years, with a compound annual growth rate of over 10% over the last five years. Most utilities offer a dividend growth rate in the low to mid-single digits. A double-digit growth rate is almost unheard of for this sector.
Shares of the company aren’t cheap, as they trade with a trailing price-earnings ratio of 26.5 and a forward price-earnings ratio of 24.4, but NextEra Energy’s regulated and renewable businesses are quite strong. Even with the current valuation, I believe NextEra Energy can be bought following the drop in share price.
Verizon Communications
Verizon’s wireless network covers nearly every person and geographic location in the U.S., making the company one of the largest wireless carriers in the country. The company spent a good portion of 2019 rolling out 5G Ultra-Wideband service in multiple cities around the country, including Dallas, Washington D.C. and Atlanta. Wireless accounts for ~75% of revenues, with broadband and cable services contributing the remainder.
I consider Verizon, as well as its peer AT&T (T, Financial), to almost be utility-like in that they provide a service that consumers are likely to maintain even if the economy has a downturn. Smartphones are so prevalent in our society that many people could not function in their day to day lives without one. You would probably be surprised as to what people would give up in order to keep their phone.
For this reason, Verizon’s business and stock would probably weather a recession or bear market fairly well. Verizon added more than 1.2 million retail postpaid customers in the most recent quarter, including 790,000 smartphone net adds. This was the company’s best quarter for net adds in six years. In addition, Verizon continues to command a very high level of customer loyalty as the churn rate was just 0.86%, which is at or near the top in its industry.
Verizon’s stock faired very well during a very turbulent week for the rest of the market as shares were essentially flat. This is a strong indication that the stock could perform much better than the indexes going forward. Shares are off about 13% from the 52-week high. Verizon offers a yield of 4.8%, above the stock’s five-year average yield of 4.4% and more than double that of the average yield for the S&P 500.
Verizon has increased its dividend for the past 15 years, with a compound annual growth rate of 2% over the last five years. In my opinion, the high yield makes up for the low dividend growth.
Verizon trades with a trailing price-earnings ratio of 11.3 and a forward price-earnings ratio of 11. Unlike NextEra Energy, the stock isn’t down more than 20% from its 52-week high, but the strong business model, high yield and low valuation make shares of Verizon very attractive in what has become an incredible volatile market.
Final thoughts
This has been one of the more difficult times for the stock market in the last decade. The last week was especially tough due to the sheer velocity of the up and down swings in markets. Long-term investors need to think years down the road, especially if they are far from retirement. Focusing on areas of the economy that are more predictable and resilient to downturns can protect your portfolio.
NextEra Energy and Verizon are two examples of the types of stocks I feel investors should consider purchasing today. Both companies reside in the more recession proof areas of the economy and both have a long history of dividend growth. As such, NextEra Energy and Verizon are at the top of my watchlist for stocks to purchase.
Disclosure: Author is long AT&T, NextEra Energy and Verizon Communications.
Read more here:
- The First 5 Stocks New Dividend Growth Investors Should Buy
- 3 High-Yield Utility Stocks You Can Buy Today
- 5 High-Yield Financial Stocks to Buy Thanks to the Coronavirus
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