In a low yield environment where Treasuries and money markets just aren’t getting the job done, income investors may want to revisit the Utilities Select Sector SPDR (NYSEArca: XLU).
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.
“All conventional metrics for valuing utilities using earnings, book value, and dividend yield have come down from the record peaks reached earlier this year. We think the following utilities offer investors an opportunity for capital appreciation and yield well above the peer group,” according to Morningstar.
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 Excellence
“We think Duke Energy’s DUK valuation discount to peers is unjustified, given the company’s favorable regulation and investment opportunities that support consistent earnings and dividend growth,” said Morningstar. “Florida remains one of the most constructive regulatory jurisdictions, with sector-leading allowed returns on equity, automatic rate base adjustments, and strong growth investment potential. North Carolina continues to support Duke’s growth investments in electric and gas transmission and distribution infrastructure.”
DUK is a top 10 holding in XLU, the largest utilities ETF. Souther Company (NYSE: SO), another marquee holding in XLU, also looks compelling.
“Southern SO is undergoing one of the most dramatic transformations in the usually stodgy world of regulated utilities,” according to Morningstar. “In 2000, almost 80% of electricity sold to customers was generated using coal. We estimate it will be less than 20% by 2030, and the company recently announced a goal of low- and no-carbon generation by 2050 that will probably require the closure of the remaining coal plants.”
XLU yields 3.41%.
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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.
