These are the last two cheap pension dividends

If you’ve been watching utility stocks over the past few months, you might be thinking our chance to buy those big dividends is over.

It is not: There are still two attractive utility companies that offer both high dividends (up to 7%) and steadily increasing payouts. Why are these bargains still available? We’ll get to that in a moment.

First, let’s talk about why utilities are at the top of our buy list this year: When rates fall, the ‘utes fly.

Most people view utilities as bond proxies, which is why they shredded when interest rates skyrocketed in 2022. Why bother with low volatility Utilities if you can get one guaranteed almost 5% payout from a 2-year government bond?

But when interest rates fall and the nice government revenues are no longer in question, people flock back to utilities. The result can be some shockingly big moves for a normally quiet sector. Consider American Electricity Company (AEP)which we published in the February issue of my Hidden returns Service.

Man, a lot has changed since then.

At the end of February, we had just received an unexpectedly high consumer price index, and the specter of inflation was back. The media feared that after all these rate hikes, the Fed would not be able to “stick the landing,” as Bloomberg aptly put it:

We did not buy it. The Fed had clearly tightened interest rates, so it was a question of Whennot Ifinflation would fall.

Six months later, inflation is at 2.9%, the upper end of the Fed’s target range. And Jay Powell told us bluntly at the Fed’s Jackson Hole meeting on Friday that rate cuts are now imminent. And the so-called “long-term interest rate” – the yield on the 10-year Treasury note – has fallen from 4.3% to around 3.8% at the time of writing.

American Electric? It’s up 22.7% – a gigantic move for a utility company. Many utilities have done the same, and to be honest, we see most of them as holds now (including AEP). But as I said, there are Despite it a few that were overlooked.

The first is a US company with significant operations outside of America’s borders. The other is a telecommunications company based in Canada – a country where only three companies dominate mobile communications. And Canadians, like Americans, are not will limit their cell phone use whether there is a recession or not.

Supply Bargain #1: AES Corp. (AES)

As of this writing, AES Corp. is yielding 3.9%, and the dividend is doing what you would expect from a company as stable as this: it is steadily increasing.

Look at the slow and steady increase in distributions over the past nine years (through rising and falling interest rates and the pandemic) and also the impact that distribution growth has had on the stock price.

Like a badly behaved dog on a leash, the stock price (orange) sometimes jumps in front of the payline and sometimes falls back. But eventually it comes back to the purple line. At the moment it is behind– a sign that AES is undervalued.

You can also see in the chart above that the AES price is well below its recent high in May, even though 10-year Treasury yields have fallen since then.

This may be because AES operates in a number of markets outside the US, such as Brazil, Mexico, the Netherlands and the UK, making it a little more difficult for first-time investors to determine the value of a company than, for example, a purely domestic player. Duke Energy (DUK) or Southern Co. (SO).

Investors may still be suffering from the “dollar bulldozer” attack: the high dollar of recent years. But lower interest rates will weigh on the dollar and make AES sales more valuable. We have already seen a slowdown this summer.

AES is also targeting growth in renewable energy: 56 percent of its 35,632 megawatts of operating capacity comes from hydro, solar, wind and landfill gas, as well as the battery capacity needed to store electricity from these sources.

From a business perspective, this is simply smart: According to a 2023 study by the International Renewable Energy Agency (IRENA), 86% of the renewable energy capacity that came online in 2022 was cheaper than electricity from fossil fuels.

In addition, AES continues to position itself as a leading power provider for data centers that drive the power-hungry development of AI.

In the second quarter, for example, management signed contracts for 1.2 gigawatts to supply power to data centers and is in talks for a further three gigawatts.

Many experts have touted utilities as a “backdoor” play on AI. Frankly, I’m skeptical: interest rates are a far bigger driver for utility stocks. But it Is Still, it’s nice to see AES capitalizing on this growing source of demand.

Supply Bargain No. 2: Telus Corp. (TU)

Canadian telecommunications company (TU) as of this writing, it is yielding 7%. But if you look at the dividend chart, it is not nearly as stable as AES’s staircase:

No, this isn’t a series of random cuts and increases. It’s entirely due to currency fluctuations (Telus, by the way, conveniently trades on the NYSE under the symbol TU). But a weaker U.S. dollar means the Canadian “loonie” — the slang term for the Canadian currency — could convert into more greenbacks for us.

And when you look at the dividend in Canadian currency (along with the share price performance), you can see that Telus’ “dividend magnet” kept the price up until interest rates (in the US and Canada) soared in 2022 and the shares crashed.

With interest rates now providing a tailwind (the Bank of Canada has already cut them twice and will likely do so again in September), I expect the stock price to rise again.

In addition, Telus benefits from the fact that the Canadian mobile phone market is essentially an oligopoly. Telus, BCE Inc. (BCE) And Rogers Communications (RCI) Together they control just under 90%. This situation has more or less existed for years (although a slightly larger market share now goes to regional suppliers).

That gives these companies stable revenues that fuel their dividends. Telus, which is more focused on wireless Internet access and the home, is also benefiting from Canada’s rapidly growing population, management noted in its second-quarter earnings report.

Finally, lower interest rates will help lower borrowing costs over the long term and make the company’s high (and rising) distributions more attractive to income-seeking investors.

Brett Owens is Chief Investment Strategist for Contrary outlook. For more great income ideas, check out his latest special report: Your early retirement portfolio: Huge dividends – every month – forever.

Disclosure: none