It has been an up-and-down year for the stock market, and despite their usual slow-and-steady style, the same has been true for utility stocks.
Utilities were beaten down in anticipation of a rate hike from Janet Yellen and the Fed. After peaking near $50 in late January, the Utilities Select Sector SPDR ETF (XLU) sank to almost $40 by late June.
Now that investors know Yellen & Co. are feeling dovish, though, and have again kicked the can down the road with regards to a rate hike, some picks within the sector are rebounding. While XLU is barely sitting about $40 still, it has gained almost 4% in the last month — while the broader market has hardly budged — and has been the best-performing sector since the Fed announcement.
Such a correlation is logical, of course — investors hungry for yield are far from satiated by 10-year Treasuries. The yield barely tops 2% right now … less than the 2.2% dividend yield of the overall S&P 500!
Meanwhile, utilities are known for their extra-sweet payouts.
Plus, while the consensus seems to be for a December rate hike right now, investors were also bracing for a September move that never came.
Put another way, the low-yield environment could be here to stay for a bit — and that bodes well for utility stocks.
Opportunities Across Utility Stocks
The proof is in the pudding, too. American Water Works (AWK) and Atmos Energy (ATO) have each gained about 8% over the last month, Aqua America (WTR) and Consolidated Edison (ED) have each improved by 7%, while Public Service Enterprise Group (PEG) has posted 6% gains — also nothing to sneeze at.
PEG stock, for one, is a domestic energy holding company focused on the transmission of electricity and distribution of electricity and natural gas. And while that’s nice, it’s the company’s yield that really makes it worth considering right now. Even after the recent climb, Public Service Enterprise Group’s 39-cent quarterly payout translates to a forward yield of 3.8% — nearly double the 10-year Treasuries.
One thing to note: Earnings and revenue are slated to move more or less sideways for PEG in the next couple of years … but that’s to be expected with the sector. Stocks with explosive growth don’t shell out big-time dividend payments as a general rule.
And it’s not just big-time dividend payments that make PEG stock attractive — it’s payments that keep getting bigger.
Since PEG posted a two-for-one stock split in early 2008, it has raised its dividend every year — even in the depths of the Great Recession — except for in 2011.
In other words, that yield is consistent. And the increases have been substantial, too. The quarterly payout was just over 32 cents in 2008. That means the current 39-cent payout translates to an impressive 22% expansion.
Toss in a reasonable payout ratio and the fact that PEG is a relatively stable stock with a beta of just 0.66, and it’s obvious why investors seeking income and stability are piling in.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.