Utilities versus Broader Equities and Treasuries in 2016
Did You Miss the 2016 Utility Rally—Or Is More to Come?
Utilities’ premium yields
Utilities are currently yielding more than 3.3%—far better than the average dividend yield of broader equities (SPY). Interestingly, Duke Energy (DUK) and Southern Company (SO) have dividend yields more than their industry average. In fact, utilities’ yields are 150–175 basis points higher than that of Treasuries, which has kept income-focused investors attached to utilities. Mid-size utilities like Xcel Energy (XEL) and DTE Energy (DTE) offer dividend yields near 3.5% levels.
Interest rates and utilities
That said, if interest rates begin to rise, associated yields available on bonds may become attractive again, given what utilities (RYU) offer, and utilities may begin to lose their sheen. Industry veterans expect there to be an inevitable interest rate hike in the near future, but the pace of the hikes will likely be very slow. Utilities may thus remain stable over the coming years, as their long-term historical performances depict.
Expected dividend growth
The managements of utility holding companies have meanwhile forecasted decent dividend growth over the next couple of years. Despite the evolving challenges in the sector, the earnings of utility companies are expected to grow at a constant pace, which is likely to be translated into stable dividend growth. Weather experts also have predicted normal temperatures in 2016, which should bode well for utilities.
These companies’ performances can be gauged by the iShares US Utilities ETF (IDU). IDU has gained by nearly 16% so far this year. Mid-size utilities like Xcel Energy (XEL), DTE Energy (DTE), and WEC Energy (WEC) account for nearly ~2.5% in IDU.
Continue to the next part for a discussion of the risk of correction among utilities.
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