Tag Archives: energy

Socially Responsible Investing: 3 Funds That Are Beating The Market

There’s a powerful trend emerging in the investing world. Investors are building portfolios based on their morals and values. Dubbed “socially responsible investing,” or SRI, these investors align their investments with their values by avoiding companies with poor environmental, social or governance practices. Like their counterparts, sustainable investors also want to earn a good financial return on their investment. They don’t want to sacrifice performance for social impact. And these days, they don’t have to. For the last several years, the returns on socially responsible investments have risen sharply – and many are beating the S&P 500 What’s driving the boom in Socially Responsible Investing? Socially responsible investing funds have been enjoying increasing popularity, largely due to the emergence of “impact investing” – a feel good concept that started in the U.K. The difference between the two is that socially responsible investing avoids investments that are inconsistent with the values of the investors while impact investing actively pursues a specific positive impact. For example, funds that don’t invest in companies that make alcohol, tobacco, gambling and weapons are considered socially responsible investments. A more targeted approach, impact investing addresses specific issues like sustainability, women’s rights, the environment and more. Just how popular is SRI? In 1995, there were only 55 mutual funds that engaged in SRI, with $12 billion in assets. Today there are nearly 500, with assets exceeding $500 billion. What’s In It for Investors? Socially responsible investing looks a lot different than it did just a decade ago. As SRI has evolved, the advantages for investors are numerous: SRI investors now have more investing options, with the number of funds growing rapidly. There is also increased diversification of the investments within the funds themselves, which results in less risk to the investor. Investors can now invest in socially responsible Exchange Traded Funds (ETF). There are funds of various market capitalizations and investors can choose from domestic, foreign and global funds. Investors can select a fund whose strategy and social responsibility agenda are similar to that of their own social and financial objectives. Socially Responsible Investing Is Beating the Market Socially responsible investing no longer means you have to sacrifice returns on your investment. The once meager returns of socially responsible investments have improved considerably, even beating the S&P 500. Consider the following: The Index which tracks the equity performance of socially responsible funds, Focus iShares MSCI USA ESG Select Social Index Fund (NYSEARCA: KLD ), has outperformed the S&P since 1990, with an average annual total return of 10.46% compared with the S&P 500’s 9.93%. Benchmark performance of the MSCI KLD 400 Social Index, which includes firms meeting high Environmental, Social and Governance (ESG) standards, has outperformed the S&P 500 on an annualized basis by 45 basis points since its inception (10.14%, compared to 9.69% for the S&P 500; July 1990-Dec. 2014). Not all SRI funds beat the index, but it is remarkable how closely most of them track the market as a whole. Here are some ways to add socially responsible investing to your portfolio. At the time of this writing, I do not own a position in any of the funds mentioned in this article. Socially Responsible Investing: iShares MSCI KLD 400 Social ETF For investors looking for an easy way to add socially responsible investing to their portfolio, the iShares MSCI KLD 400 Social (NYSEARCA: DSI ) is worth a look. DSI posted a 35.5% return in 2013 – beating the S&P 500. DSI posted a 12.2% return in 2014, underperforming the S&P 500 by less than 2 points. The ETF’s underlying index tracks 99% of all the stocks in the United States and includes firms with a variety of market caps. The socially responsible ETF currently tracks 400 different firms and charges 0.50% in expenses. Technology and health care firms make up the bulk of DSI’s holdings. Socially Responsible Investing: iShares MSCI USA ESG Select ETF Investors wanting to eliminate the volatility of owning smaller firms from their portfolios should consider the iShares MSCI USA ESG Select ETF. The $350 million ETF includes U.S. large-cap and some mid-cap stocks which have been screened for positive SRI characteristics. It currently includes almost a hundred different stocks – with top holdings in 3M (NYSE: MMM ), Microsoft (NASDAQ: MSFT ) and renewable energy utility NextEra Energy (NYSE: NEE ). Expenses for KLD are also 0.5%. The socially responsible investing fund has consistently posted solid returns over the last several years. In 2013, KLD posted a 31% return, which was slightly less than the benchmark index, although KLD had beaten the index for the past 5 years. In 2014, KLD posted a total return of 13.5%. Socially Responsible Investing: Huntington EcoLogical Strategy ETF The often overlooked Huntington EcoLogical Strategy ETF (NYSEARCA: HECO ) focuses on various firms making efforts on environmental issues and sustainability. It’s a well-diversified, moderate risk, capital appreciation fund. HECO focuses on “ecologically focused companies,” firms that have positioned their businesses to respond to increased environmental legislation, cultural shifts toward environmentally conscious consumption and capital investments in environmentally-oriented projects. HECO holds more than 50 different companies including Starbucks (NASDAQ: SBUX ) and Texas Instruments (NASDAQ: TXN ). The returns have been strong. HECO returned nearly 30% in 2013 and narrowly outperformed the benchmark in 2014. Expenses for the ETF are slightly high at 0.95%. Final Thoughts You don’t have to give up performance to invest with your conscience and make a difference. Serious investors interested in socially responsible investing no longer have to sacrifice investment returns for their morals. And the easiest way to add SRI to your portfolio is an Exchange Traded Fund such as the funds mentioned above. The information provided is for informational purposes, not a recommendation. As always, investors should consider their own financial objectives and time horizon when making investment decisions. Diversification and asset allocations are important considerations. Sources: 5 ETFs for the Socially Responsible Investor by Dan Kaplinger Socially Responsible Investing With ETFs by Greg Lessard Socially responsible investing has beaten the S&P 500 for decades by Jennifer Openshaw.

Add Diversified Yield To Your Dividend Growth Portfolio With 7 Equity ETFs

Summary ETFs can fill critical gaps in a dividend investor’s portfolio, especially for smaller caps and international exposure. Most so-called dividend growth ETFs have average yields in the low 2% range (scarcely above the 2% yield for the S&P 500/SPY). Screening the universe of ETFs by my DGI and qualitative metrics resulted in 7 ETFs with yields from 3% to 7.5% (DIV, EWA, DBEF, FGD, FUTY, VOE, SCHD). These recommended ETFs represent a diversity of strategies and are sorted by yield with commentary as to the pros and cons of each. (click to enlarge) With so much uncertainty in the markets (valuations, Fed, ISIS, Europe, etc), a well-diversified base of investments (especially those that pay a dividend in good times and bad) is critical. However, many people don’t have the time or expertise to assemble their own diversified holdings (this is especially true for smaller cap or international exposure). While Seeking Alpha readers generally like to be stock pickers, ETFs can provide a critical tool to filling the gaps to gaining the exposure that an investor needs but in a package that is much more practical for many. For the dividend growth investor, ETFs are not without their dangers, especially when it comes to chasing yield. A few broad tips: Understand the fund’s holdings – regardless of the marketing materials, it’s the underlying holdings that drive performance. Keep fees low – fund fees subtract directly from any yield. Avoid closed end funds (CEFs) unless you are very confident in the manager and strategy. Understand fund distribution policies to know when and how the yield will be paid. Unfortunately, most of the current offerings for ‘dividend growth funds’ are hardly better than the S&P 500’s 2% yield (as measured by SPY). For example: Vanguard Dividend Appreciation Index Fund ETF (NYSEARCA: VIG ): 2.29% yield WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ: DGRW ): 2.02% yield iShares Core Dividend Growth ETF (NYSEARCA: DGRO ): 2.25% yield As a dividend growth investor that expects yields in the 3%+ range, I have attempted to locate the ETFs that I feel are most appropriate for the DGI investor looking for a meatier yield. To identify the best ETFs out there, I have developed and applied a screening methodology which yielded 7 attractive tickers that I believe investors should consider for their portfolio. Background Since I write for Seeking Alpha primarily to improve my own investment portfolio, I think it is important that you know my objectives. Please consider this context when you look at any advice I give and form your own opinions based on your needs and desires. GOAL: Attractive, risk-adjusted, absolute returns (5-15% annually) over a long-term time frame while minimizing capital loss and extreme drawdowns. STRATEGY: ‘Enhanced’ dividend growth ((NYSE: DGI )) and growth at a reasonable price (GARP) hybrid strategy that focuses on a core of diversified holdings (ETFs and individual companies — my screening criteria are generally: P/E

Why Are Utility Black Hills Investors Seeing Red?

Black Hills recently priced a secondary offering at a full 30% off its peak price in 2014. The acquisition of SourceGas doubles its community count in states they currently service. While Moody’s and Fitch placed Black Hills on “Negative Watch”, they are generally supportive of the company’s business profile. Black Hills Corp (NYSE: BKH ) is a small cap diversified utility whose stocks price has collapsed from $60 in June 2014 to $40 currently, with share prices down 10% on Nov 17. The answer lies in two circumstances: its business profile and the issuance of dilutive equity to fund an acquisition. The first situation is more long-term and the second more short-term. Originally founded 132 years ago in Deadwood, ND (interesting name for an investment headquarters), BKH has a long history of dividend increases, stretching back to 1970. Black Hills is a utility with regulated natural gas and electricity assets and non-regulated assets, with the non-regulated assets generating the negative issues. BKH mines coal, generates electricity with coal, and explores for oil and natural gas. These business segments are currently out of favor with most investors, and are creating financial stress. Black Hills services 680,000 customers in Colorado, Iowa, Kansas and Nebraska along with 110,000 customers in South Dakota, Wyoming and Montana. 205,000 are electric customers and 585,000 are natural gas customers. Below is a graphic of its service territory. (click to enlarge) The annual dividend is currently $1.62, for a yield of 4.0%. The company has a 45-year string of dividend increases, driven in part by strong industrial load growth in electricity. Over the previous 5 years, Black Hill’s growth has been in its regulated utility business. In 2009, regulated utility business generated $126.2 million in operating income vs. $19.9 million for non-regulated. Last year, regulated businesses generated $222.4 million vs. $39.3 million for non-regulated. At no time over the previous 5 years has the non-regulated segment generate over $45 million in operating income while operating EPS over the same time frame increased from $1.38 to $2.93. Management has forecast operating EPS of $2.90 to $3.10 for this year, midpoint $3.00, and $3.15 to $3.35 for 2016, midpoint $3.25. According to S&P Credit, the states serviced have the following regulatory environment (based on three groups of regulatory friendliness – Strong, Strong/Adequate, and Adequate): Colorado and Iowa – Strong; Kansas, Nebraska, South Dakota, Wyoming, Montana – Strong/Adequate. Pre-2014, S&P Credit offered five categories of regulatory friendliness and it seems Colorado, Wyoming and Montana improved their relative positioning. In addition, Black Hills geographic service territory includes some of the higher economic growth rates. Below is a map from the Bureau of Economic Advisors of economic growth by State for 2014. As shown, Colorado and Wyoming exceeded the national average growth rate of 2.2% while the balance of the states served fell short. In general, the Rocky Mountain States saw their economic growth rate expand from 1.4% in 2011 to 3.9% in 2014 while the Plains saw their rate of growth slashed from 2.1% to 1.3%. This underlying economic growth helps to lift energy demand. (click to enlarge) Similar to the entire oil and gas exploration and production industry, BKH has experienced large non-cash write-offs for redetermination of its natural gas reserve values. The YTD charges amount to $2.53 a share, or $110 million, reducing Trailing Twelve Months reported earnings to $0.37 vs. TTM operating earnings of $3.07. In tune with their peers, BKH has slashed its capital expenditure budget for oil and gas exploration from $242 million to a measly $27 million. From an overall observation, BKH’s future lies with its regulated business, as the non-regulated business will continuing to provide a drag on investor interest. Presently, Black Hills can provide about 50% of its natural gas delivery needs from internal production, and with commodity pass-through provisions, allows BKH to be more self-sufficient than other small natural gas utilities. While not a large attribute in these times of low gas prices, if prices were to rise over time, this could add another potential profit layer. In early summer, Black Hills announced it was buying a neighboring natural gas utility from private sources. In July, BKH announced it was buying SourceGas from an investment fund owned by Alinda Capital Partners and GE Energy Financial Services for $1.89 billion, including assumption of $720 million in debt. The expansion will add 425,000 customers and solidify its position in its existing service states as the number of community served doubles to 800. In addition to the current seven states, BKH will add Arkansas customers. However, to fund the acquisition, this week management priced a 5.5 million share secondary offering at $40.50 a share, for a dilution of about 12%, based on 44.5 million shares outstanding before and 50 million after. The company will also offer equity units comprising of an interest in a 2028 subordinated debt and a collar contract to buy additional common shares between $40 and $47. When exercised, the equity units will further dilute share count by 10% and the equity unit is expected to yield 7.5%. Net proceeds from these two are expected to total $465 to $535 million on their close at the end of Nov. The original acquisition funding estimates called for $575 to $675 million in new equity. This still leaves new debt issuance of between $590 and $660 million, and is higher than the original estimate of $450 to $550 million. In connection with the acquisition, Moody’s and Fitch credit rating agencies lowered BKH’s outlook to “negative”. The added concern mainly focuses on higher debt levels BKH will take on. Moody’s comments : However, the decline in financial metrics is slightly offset by the anticipated improvement in the company’s business risk profile. The transaction brings increased scale and diversity as well as additional opportunity to grow rate base in the constructive regulatory environments that SourceGas operates in. It improves Black Hill’s overall risk profile as it adds low-risk LDC utility operations and reduces the proportional size of its higher risk E&P operations. The rating affirmations and stable outlooks on Black Hills Power and SourceGas reflect the companies’ stable utility operations with visible growth opportunities. Because Black Hills already operates in three of SourceGas’ four states, we expect Black Hills to improve efficiency by combining utility operations and to be better positioned in these states through the increased scale. Arkansas is the only state where Black Hills currently does not have any operations. In recent years, SourceGas has experienced improvements in its regulatory environment in Arkansas, including a reasonable outcome in its rate case in 2014. Fitch’s comments : BKH operates regulated electric and natural gas utilities in seven states, all of which allow for pass-through of commodity and/or purchased power costs and many feature other riders or recovery mechanisms that enhance timely recovery of expenses and invested capital. Transmission investments are regulated by the Federal Energy Regulatory Commission (FERC) or state regulatory commissions with most capital expenditures eligible for rider recovery. The diversity by regulated jurisdiction further enhances the predictability of cash flows and minimizes the effects of exogenous factors. Non-regulated investments consist of a legacy upstream energy exploration and development business. Fitch considers BKH’s coal and competitive generation businesses, which are largely contracted to BKH’s utilities, as possessing relatively low risk. BKH’s utilities, coal, and merchant generation businesses have a large degree of operational and financial integration, with jointly owned or contracted generation and common call centers. BKH has interests in the Mancos shale play and is committing relatively large capital investments in order to further assess and prove its potential reserves in the area. BKH’s proposal to place a portion of its natural gas assets into a nonregulated exploration and production subsidiary, which would supply its utilities with up to 50% of annual gas consumption through long-term contracts, if successful would reduce the inherent risks and volatility of the non-regulated oil and gas business segment and would be viewed positively by Fitch. BKH has traditionally managed this business in a conservative manner and uses swaps and other instruments up to two years in duration to hedge pricing risk. Black Hills has earned a disappointing S&P Equity Quality Below Average Rating of “B”. Fastgraph outlines the current valuation for BKH in the chart below, along with a historic review of return on invested capital ROIC. ROIC between 2006 and 2011 were at sector average of 4% to 5%., but has improved since 2011. (click to enlarge) Source: fastgraph.com (click to enlarge) Source: fastgraph.com Since 2014, investors have punished BKH with a substantial stock price haircut, but the barber may not yet be done. By all accounts, the acquisition of SourceGas will reduce the company’s risk profile by increasing its regulated footprint in states where they have a good PUC relationships. Black Hills would be more enticing with a further dip in price to generate a higher yield, but nibbling here could offer interesting opportunities as a small-cap portfolio diversifier serving the Rocky Mountain and Plains geographic area. Author’s Note: Please review disclosure in Author’s profile.