Conventional wisdom says rising interest rates mean utilities stocks will fall. But, these aren’t conventional times.
Conventional wisdom has it that when interest rates go up, stocks of utilities companies go down.
Since these utilities are regulated monopolies or near-monopolies, they have a lock on their markets, affording them fairly low credit risk. And, like lower-risk government bonds, they pay out a steady stream of cash, albeit in the form of dividends. That’s why utilities are often thought of as bonds.
It’s also why utilities stocks fall as interest rates go up. This allows the dividend to be a higher percentage of the price of the stock, roughly matching the increase in rates.
Again, that’s conventional wisdom but these aren’t conventional times. Interest rates on 10-year US government bonds haven’t been this low since 1941. Even this past month’s move up in those rates still keeps it below where it was during the Great Depression.
According to Talking Numbers contributors Steve Cortes, Founder of Veracruz TJM, and Richard Ross, Global Technical Strategist at Auerbach Grayson, there may be opportunities in utilities even as rates go up from here.
To hear where Cortes and Ross think the next play in utilities will be, watch the video above.
[Disclosure: Steve Cortes owns shares of Southern Company.]
- Conventional wisdom