The utilities sector is one of this year’s best-performing groups, underscoring the notion that many investors will embrace utilities stocks and exchange traded funds during favorable interest rate environments. It is widely expected the Federal Reserve will not raise interest rates this year and some bond market participants are betting on a rate cut late this year.
The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF by assets, is up 9.32% this year and yields 3.11%, well above the yield on 10-year Treasuries or the S&P 500.
“Yet for income investors, utilities’ dividends have rarely looked so attractive. U.S. utilities’ 3.4% average yield is 90 basis points above the 10-year U.S. Treasury yield as of late March, a reliable buy signal,” said Morningstar in a recent note. “Most utilities’ dividends are well-covered and set to grow more than 5% annually the next three to five years. We think some utilities’ dividend growth could top 10% for several years. Apart from a few special situations, we see no risk of dividend cuts across the sector.”
For investors that want some utilities exposure without the commitment of a dedicated ETF such as XLU, there are other fund to consider. Those ETFs include the ProShares S&P MidCap 400 Dividend Aristocrats ETF (CBOE: REGL) and the ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV).
Ample Utilities Exposure
REGL, which recently turned four years old, follows the S&P MidCap 400 Dividend Aristocrats Index. That is the dividend aristocrats offshoot of the widely followed S&P MidCap 400 Index. REGL’s components, which currently number 52, are required to have minimum dividend increase streaks of 15 years.
REGL, which has 30-day SEC yield of 1.89%, allocates 13.43% of its weight to utilities stocks, making that sector the fund’s third-largest sector weight.
SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade.
That ETF has 30-day SEC yield of 2.28% and allocates 25.70% of its weight to utilities stocks, by far its largest sector weight.
“We also think there could be an exceptional buying opportunity if the sector makes a modest correction. U.S. utilities went into 2019 trading at fair value on average and have rallied 9% year to date. When utilities dipped below fair value in mid-2015 they went on to rally 30% during the next 12 months,” according to Morningstar.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.