logo
  Join        Login             Stock Quote

Sector Review: Utility ETFs For High Yield And Stability

 July 11, 2010 06:36 PM
 


Investors are starting to pay more attention to Utility Stocks and Utility ETFs of late given the low interest rate environment that doesn't seem to have an end in sight.  With the 10-year Treasury hovering around 3% and the prospect of loss of principal one bonds when rates do rise eventually, the prospect of equities with yields greater than bond yields becomes particularly appealing.  Heck, even Target Date Mutual Funds behaved outrageously during the financial downturn, in many cases losing 30-40% for 2010 target dates.

In the individual large utilities space, companies like Exelon (EXC) and Dominion (D) are yielding about 5%, but they subject you to individual equity risk.  The following diversified Utility Stock ETFs are all yielding a respectable 4-5%.

[Related -Why dividend-paying utilities stocks could lag again in 2014]

iShares Dow Jones US Utilities Sector Index Fund (IDU)
Utilities Select Sector SPDR (XLU)
Vanguard Utilities ETF (VPU)

Why Utility Stock ETFs?

  • Yield – The yields are higher than any conventional income asset class, albeit with no guarantee of capital preservation.  With money markets, CDs and government bonds paying significantly less, investors are paying attention.
  • Smoothed Volatility - While the utility stock index is subject to equity risk like any other common stock, the overall volatility tends to be less than the broader market.  So, in a wildly bullish upswing, you could expect the Utilities to under-perform, but in a down market, historically, they have held their own compared to the broader market.  In a flat market, they outperform since the yields are close to double those of the broader market.
  • Potential for Capital Appreciation – As a side benefit, as a rising tide lifts all ships, as more investor inflows occur with the Trillions of dollars of cash on the sidelines in pensions, individual investor and sovereign accounts, expect capital appreciation as well, which you don't get in a CD or money market.  And Treasury Bond Yields can't go much lower, so don't expect appreciation in government bonds either.
  • Dividend Increases - Another benefit here is that over time, utilities tend to steadily increase their dividend payouts as earnings grow.  Again, you get no increase in a bond coupon.

Utility Stock ETFs Have Out-Performed

[Related -Bond Yields Rise On Stronger Economic Data]

In taking a look at the Utility ETF (XLU) vs.


Next Page >>12
iOnTheMarket Premium
Advertisement

Advertisement


Comments Closed


rss feed

Latest Stories

article imageTwo Firms On The Cusp Of A Major Turnaround

When a company stumbles repeatedly, investors eventually throw in the towel and sell their shares. read on...

article imagePick a Valid Strategy, Stick With It

I’m not going to argue for any particular strategy here. My main point is this: every valid strategy is read on...

article imageHow to Prepare For A Correction Without Missing Out On Upside Potential

Recent market commentary is starting to remind me of the periods in 2000 and 2008 just before the bottom read on...

article imageBritain’s Boom Can Still Zoom

Don’t overthink the disconnect between strong UK GDP and wobbly UK stocks. Economic fundamentals should win read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.