In light of the lingering market uncertainty and record low Treasury payouts, yield hunters have zeroed in on the safe and decent payouts from utilities exchange traded funds, but investors should still remain cautious as the sector is beginning to look overcrowded.
“We do continue to advocate a dividend bias, but believe investors need to avoid overpaying for that income stream,” Russ Koesterich, Managing Director iShares Global Chief Investment Strategest, said in a research note. “In particular, we believe that investors should be very cautious on the U.S. utilities sector.”
Given the prevailing loose monetary policies around the globe and low yields on government debt, investors have become more creative in their search for yields. Consequently, many investors have paid up for income generating investments.
“We believe that investors have probably pushed this trend too far, with utilities now looking very overvalued,” Koesterich added. “Given that utilities are a slow-growing, regulated industry, utilities historically trade at a discount to the broader market; since 1995, the average discount has been roughly 25% of the S&P 500. However, today utilities are trading at more than an 8% premium, the largest premium since late 2007.”