The normally docile Utilities Select Sector SPDR (NYSEArca: XLU) and its peers have been a bit more volatile than usual in recent months, but even with equities on the mend, investors shouldn’t forget about the defensive, income-generating sector.

Utilities are typically more stable stocks since the demand for their services, notably electricity and gas, is steady from both consumers and businesses. Moreover, in a lower-for-longer yield environment, utilities come with more attractive above-average dividends.

“The past three months prove investors should heed valuation signals, even for utilities,” said Morningstar analyst Andrew Bischof in a recent note. “Since we warned of record-high utilities valuations in late February, the Morningstar U.S. Utilities Index is down 15%, trailing the S&P 500 (down 8%). U.S. utilities are now in line with our fair value estimates. With interest rates still low, investors might find dividend yields attractive.”

XLU Still Matters

The defensive and yield-generating utilities play is garnering greater attention as a growing number of people are looking to global central banks, including the Fed, to lose monetary policies and execute accommodative measures to obviate a potential economic downturn in response to the coronavirus outbreak. XLU, the largest utilities ETF, now yields an impressive 3.18%, far higher than the yields found on the S&P 500 or 10-year Treasuries.

Additionally, many XLU member firms are making the necessary investments to capture long-term growth.

“We forecast $656 billion of capital expenditures over the next five years for the U.S. utilities we cover, more bullish than consensus and up from $541 billion during the past five years,” writes Bischof. “This capital investment supports our median 5.5% earnings growth and 6.5% dividend growth forecasts through 2024.”

Utilities are typically more stable stocks since the demand for their services, notably electricity and gas, is steady from both consumers and businesses. Moreover, in a lower-for-longer yield environment, utilities come with more attractive above-average dividends.

Importantly, XLU components offer some exposure to the renewable energy boom, which bolsters the long-term thesis for the ETF.

“Growth and income investors will benefit from owning companies that invest in renewable energy and supporting infrastructure during the next 5-10 years. Utilities have substantial ground to cover to meet public policy targets and corporate demand,” according to Bischof.

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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.