Traditionally, utilities shares are well known for their defensive qualities. This makes them the go-to shares when the market exhibits weakness or starts to look bearish.
Generally during these times utilities shares will outperform the broader market. The trade off here, though, is that conversely when the markets are in a bullish frame of mind these shares will often get left behind by the broader market. But thankfully, due to the strong dividends they usually pay, they still provide reasonable returns to their shareholders even in bull markets.
On the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) there are two utilities shares that I feel are good picks in the volatile times that we are experiencing at the moment.
The first one is AGL Energy Ltd (ASX: AGL). As of Wednesday's market close AGL Energy is actually up 5.2% year-to-date, compared to the ASX 200 which has lost over 8%. This means AGL is outperforming the broader market by a whopping 13.2%.
Although AGL Energy pays a dividend that is below the market average. It does yield a fully-franked 3.5% which is still an appealing yield. I like AGL Energy not just for its defensive qualities, but because it is expected by analysts to grow its earnings from 99.7 cents per share in 2016 to $1.31 in 2018. This earnings growth might keep the share price growing at a good rate for a couple of years at least.
Next on the list is DUET Group (ASX: DUE). Although DUET Group has put on just 0.44% so far in 2016, it does mean it has outperformed the broader market by over 8%. This, in my opinion, once again shows how these defensive shares can be great investments during market turbulence.
Unlike AGL Energy, DUET Group pays a dividend that is above the market average. It too is expected to continue to grow each year for the foreseeable future according to CommSec. Today its dividend yields 7.6%, and while this is not fully-franked, the tax adjusted yield is still a very good 4.2%. DUET Group is also expected by analysts to increase its earnings next year, anticipating growth from 9.9 cents per share to 10.8 cents per share. This for me makes it a worthy investment in the current market.
Foolish takeaway
Judging by the performance of both AGL Energy and DUET Group it does appear that the tradition of moving capital to utilities shares in volatile times is alive and well. While in bull markets the share price growth may lag the likes of Flight Centre Travel Group Ltd (ASX: FLT), the defensive qualities and strong dividends the shares provide will certainly make up for this in the long run.
