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What's up with utilities and high-yield stocks?

In a quiet week, one of the main topics of interest was the Dow Utilities' 4-percent drop in the last two trading days, following a huge rally in the middle of the month. It was still the best-performing of the major indices, up 28 percent for 2014. All this occurred without a bond market rally.

What's up? The drop in the last couple days can safely be chalked up to profit taking, but the huge run-up in 2014 is a little harder to explain. There has clearly been an expanded class of investors in utilities.

If you believe rates are going up in 2015, why would you buy utilities? Because you can still get EPS growth of 5 percent or more and consistent, low-risk yields of roughly 3 to 4 percent. Despite the huge price run-ups, the dividend yields remain attractive on a comparative basis.

Utility dividend yields:

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Low natural gas and coal prices are also a help. Roughly 40 percent of power generation now comes from natural gas, up from 28 percent a few years ago.

Investors seem to believe that those yields are relatively safe, unlike yields from oil and gas partnerships, some of which are in the stratosphere due to the plunge in share prices.

Oil and gas partnerships dividend yields:

Given that some of these names are down more than 50 percent in the past month—Linn Energy has gone from roughly $22 to $10—there is clearly a concern that these payouts are at risk.

Those concerns are well-founded. This morning, Linn Energy cut its annual dividend to $1.25 a share from $2.90.

Other Master Limited Partnerships that primarily own pipelines, not oil and gas resources, have been hit but not nearly as much. The Alerian MLP ETF, a basket of infrastructure MLPs, went from roughly $18 at the start of December to $16, but has since rallied back to $17.52; it is yielding north of 6 percent.

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The argument is that these firms are essentially toll-keepers that collect money from their customers who use the pipelines, and though many assume total flows may be somewhat lower in 2015, many players insist total flows will increase in 2015.

By the way, a number of oil drillers are also sporting dividend yields in the stratosphere:

Oil drillers dividend yields:

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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