Forget the easy money that was to be had last year; things have changed.
The easy money is gone, folks.
Bargains are still out there. But not easy bargains. Easy bargains were things like Barclays (LSE: BARC) at 51p on a P/E of about 3, or Legal & General Group (LSE: LGEN) at 23p on a P/E of well under 3. Those were easy bargains. Those were the things of March 2009.
But those days are gone. Ten months and a 60% rally later, no-brainer buys are few and far between. One year ago you could point, shoot, and nail success. Today you've got to use a little more brain power.
Here's why
Now that shares have returned to sane levels, investors should ask what future economic growth will look like. Forecasting this stuff with precision is a mug's game, but we can at least make broad observations.
Right now, the economy appears to be propped up almost entirely by stimulus measures and temporary factors like inventory restocking. If you look at recent GDP figures from around the world -- heralded by some as proof the Great Recession has died -- you'll see that sustainable drivers of economic growth are virtually nonexistent. To get real, sustainable growth, you need to see vigour return to consumers, since that's where most of our economic engine resides. Not only is this not happening, but the odds of it happening anytime soon are scant.
The reason is debt. Household debt as a percentage of average earnings has been rising for decades, and in the UK it stands at over 130%. Consumers still have their work cut out for them when it comes to purging the excesses of the past decade. As long as they do, spending will plod along miserably, and so will economic growth.
What now?
Is all hope lost? If you refuse to acknowledge the new economic world we live in, yes. You're doomed, dear investor. It's a different world today.
The "new normal" is a world of slower growth, less spending, and debt reduction rather than accumulation. Take the past two decades, throw them upside down, and that's the new normal. This is necessary and vital to getting back on track. But it nonetheless leads to a painful conclusion for investors: Lower economic growth could mean lower real returns on assets like shares.
There is a solution, though, and one sector that will be amongst the most resilient, providing necessities that nobody can do without, is the utilities sector.
Utilities
Pricewise, utilities are mostly up from their 2009 lows, but still way down on their previous 2008 levels. Their growth in earnings should mimic the economy as it always has, and most importantly they yield around 5-6% in dividends.
Ah, utilities. Most pay just about every penny of free cash flow out as dividends because there's nothing else management can do with it. It's as mind-numbingly boring as it gets.
United Utilities (LSE: UU) has a prospective 7% yield for March 2010, and though its dividend has fallen from previous years, it should keep track with earnings and with the economy. Severn Trent (LSE: SVT) is on a prospective yield of 6%, based on a dividend that is expected to rise from last year. And National Grid (LSE: NG) comes in with a prospective dividend of over 6%, has consistently increased it year-on-year, and is forecast to carry on increasing it for the next two years.
I know what you're thinking: 6% return? That's it? This is how I'm going to make money? Well, remember the opening words of this article: The easy money is gone. If the economy slogs along, squeezing out lethargic growth, you won't be disappointed with those returns. This ain't the '90s, folks.
Moving on
The past several decades were based on investors honing in on capital gains as a way to get rich. If there's a theme I'd expect for the coming decade, it'd be a reversion to focusing on the tangible returns of dividends. When economic growth can't be counted on, dividends can, especially in non-cyclical industries like utilities.
More on the economy and the markets:
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> A version of this article was published originally on Fool.com. It has been updated by Alan Oscroft.
