The utilities sector is classified as a defensive group. As such, it’s often viewed as boring. It’s also seen as negatively correlated to rising interest rates.
The sector and the related exchange traded funds didn’t get those memos. The cap-weighted S&P 500 Utilities Index is up 5.48% year-to-date. The equal-weight alternative — the Invesco S&P 500 Equal Weight Utilities ETF (NYSEArca: RYU) — is proving superior, as highlighted by a year-to-date advantage of 200 basis points over the utilities benchmark.
The strength of utilities stocks and ETFs this year isn’t surprising just because of rising interest rates. It’s also catching investors off guard due to high inflation, a scenario that’s usually a drag on this cost-intensive sector. However, performance can’t be ignored, as highlighted by RYU’s stout first-quarter run, and some analysts are bullish on select names in this sector. Those stocks include Dominion Energy (NYSE:D).
“Dominion Energy is in the Virginia area. So, they have a very constructive and 100% renewable energy target in Virginia. So, a lot of political momentum to support investment,” says Morningstar utilities analyst Travis Miller.
Dominion accounts for 3.34% of RYU’s weight. None of the fund’s 30 holdings exceed an allocation of 3.75%. Miller is also bullish on Eversource Energy (NYSE:ES), which accounts for 3.41% of RYU’s roster, though the analyst notes that there’s some risk with this New England utility.
“So, they’re going to be the largest offshore wind investor in the Northeast ultimately; $5 billion they want to invest in offshore wind. These are not protected in terms of regulated rate type of investments. These are essentially themselves putting capital into the ocean and hoping they get a return on that,” Miller said.
Adding to the case for RYU is dividend security, which should be a top priority for investors when considering the utilities sector.
“So, utilities in terms of their dividend yields start in a really good spot.They start with a very good premium to interest rates. So, again, one of the things where if interest rates were to go up, historically speaking, utilities are really still the only place to go for a very attractive dividend yield,” concludes Miller.
RYU sports a dividend yield of 2.43% as of April 1.
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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.