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10 Attractive Utility Stocks to Buy While They’re Down

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Utility stocks tanked hard starting in mid-November on worries about rising interest rates, which can be bad for supposed “bond proxies” like utes. The broad Utilities Select Sector SPDR Fund (XLU ) is off 11% since Nov. 17, versus a 4% gain for the Standard & Poor’s 500-stock index.

But given the severe damage, these fears about fallout from rising rates may be fully priced in by now. Besides, many of the worries are unfounded to begin with. Here are a few quick reasons why utility stocks look attractive in this selloff, followed by 10 companies to consider buying.

Utilities aren’t really bond proxies. Bonds pay a fixed coupon. Utilities constantly increase their earnings and dividends. So they aren’t really bond proxies, says Gabelli & Company utility-stock analyst Timothy Winter. Electricity utilities increased their dividends by 5.9% in 2017, off earnings growth of about the same amount. “They are going to grow their way right through the modest increases in the Treasury yield,” Winter says.


Fundamentals are sound. Winter predicts utilities will grow earnings 5%-6% annually over the next three to five years – much better than historical growth in the 3%-4%. Interest in renewable energy, the worn-down infrastructure and electric vehicles all support a veritable “super cycle” in utility capital investments, he says. This is good for investors because utilities make money by getting set rate of return on investments in infrastructure, which is called their “rate base.” The more they spend, the more they earn.

Interest rates might not go up as much as investors fear. Several structural forces put downward pressure on prices, such as technology, cheap foreign labor and the aging population (older people earn and spend less). If inflation fails to heat up significantly, interest rates won’t rocket higher, either. Besides, if interest rates and inflation do go up, regulators will approve higher utility bills to offset some of the damage.

Utes look cheap. Historically, when 10-year U.S. treasury yields are 2.5%-3%, utes trade at a significant premium to the S&P 500. They currently trade at a discount, says Goldman Sachs utility sector analyst Michael Lapides. “Adjusted for interest rates, the price-to-earnings multiples appear reasonable considering the strong fundamental outlook,” Winter agrees.

Utilities are defensive. If we are headed for a bear market, the end of the economic cycle or geopolitical turmoil, utility stocks will add defensive exposure to your portfolio.

SEE ALSO: 50 Dividend Stocks You Can Count On

Data is as of March 6, 2018. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Click on ticker-symbol links in each slide for current share prices and more.


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