Utility stocks are the one S&P 500 sector in the green on Thursday and are the top performers of the past month.
This comes as investors scramble for income in an environment where the 10-year Treasury yield is quickly approaching 3 percent and the stock market is little changed to down for the year.
“Regulated utility dividend yields are cheap relative to Baa corporate bonds and Treasury notes,” wrote Barclays Capital analyst Daniel Ford, who upgraded the sector to ‘positive’ from ‘neutral’ today. “Income fund flows have begun to improve for dividend yielding stocks year-to-date exploiting this opportunity. We expect this to continue.”
The Utilities SPDR is up 5 percent in the past month as data point after data point signals a retrenchment in the U.S. economy and the subsequent disappearance of growth opportunities. The Fed acknowledged this much in its statement yesterday, sending Treasury yields are their latest tailspin.
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Utilities have long been valued for their steady dividend income with their holders often referred to as “widows and orphans.” Now even hedge funds are putting on the black veil and buying the stocks as the reality of a low-return environment becomes apparent.
The three biggest holdings in the utilities ETF are Southern Co., Exelon and Dominion Resources. All three have dividend yields around 5 percent. These kinds of payouts means utilities are 35 percent undervalued relative to government bonds, notes Barclays.
“Exelon’s five percent yield is not bad in this environment and plus its leveraged to the nuclear power growth story,” said Patty Edwards, founder of Storehouse Partners and a ‘Fast Money’ contributor.
And the timing is right for the power stocks to be powering up. “In months 15 to 24 of a recovery, regulated utilities again outperform the S&P,” wrote Barclays’ Ford in his note. As the economic recover plateaus, historically this chase for income begins.
Plus if this economy goes from troubled to double dip territory, utilities have something else going for them.
“Power is the one thing we can’t live without besides food,” said Edwards.
With reporting by Courtney Gartman
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