Turn the Lights on to the Utilities Sector | ETF Trends

It’s one of the smallest sectors in the S&P 500, and it scuffled through the first seven months of 2023. Throw in the fact that seemingly every market participant is enamored by mega-cap growth stocks, and it’s easy to see why utilities stocks are flying under the radar in 2023.

On the other hand, some experts may be apt to argue that the ideal time to consider stocks and exchange traded funds from a particular sector is when that group is out of favor. With that in mind, investors may want to evaluate the Invesco S&P 500 Equal Weight Utilities ETF (RSPU).

RSPU, which follows the S&P 500® Equal Weight Utilities Plus Index, isn’t setting the world ablaze from a performance perspective this year. Not yet, anyway, but it is topping market-capitalization-weighted rivals. That’s a step in the right direction.

RSPU Home to Some Safe Dividends

One of the primary reasons equity investors consider utilities stocks is big dividends. RSPU reflects that proposition with a trailing 12-month distribution rate of 4.86%, according to issuer data.

That percentage is undoubtedly attractive to many income-oriented market participants. However, experienced investors know that stocks or equity-based ETFs sporting big dividend yields require further examination to ensure the payouts are safe.

When it comes to the $350.3 million RSPU, it appears as though dividends on many of the ETF’s 32 holdings are in good shape, as measured by the dividend coverage ratio — a fancy way of saying a company’s ability to sustain its payout obligations. RSPU holding Dominion Energy (NYSE: D) is an example of a utilities stock with strong dividend safety.

“Dominion tops the list with a hefty 5% dividend yield. The Richmond, Virginia power producer also has a cash dividend coverage ratio of 3.2 and 7.2% upside to the average price target, according to FactSet. Just 23.5% of analysts covering the stock rate it a buy,” reported Michell Fox for CNBC.

NiSource (NYSE: NI), another RSPU member firm, reportedly has one of the safest payouts among all utilities stocks.

“NiSource has a cash dividend ratio of 4.4, a dividend yield of 3.6% and 11% upside to analysts’ average price target. Three-quarters of the analysts covering NiSource rate it a buy,” according to CNBC.

Another, longer-ranging factor could work in favor of RSPU and utilities stocks: expectations of the Federal Reserve lowering interest rates next year. It remains to be seen if the central bank will do that, but it’d likely be a boon for RSPU because, on a historical basis, utilities stocks are among the most inversely correlated to rising rates.

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