Utility Stocks: What to Expect in the Future

Widow-and-orphan stocks beat S&P 500

Recently, utility stocks have outperformed broader markets. Over the past 12 months, utilities (XLU) have returned 19% including dividends, while the S&P 500 has returned 9%.

The FOMC kept the interest rates unchanged last week. So far in 2019, the benchmark ten-year Treasury yields have fallen more than 20%. A probable rate cut could make utility stocks more attractive. US Treasury Secretary Steven Mnuchin’s comments about the trade deal with China are positive for broader markets. His comments could be negative for utilities.

Utility Stocks: What to Expect in the Future

Steady dividend yield

Utility stocks (IDU) are usually seen as bond substitutes due to their steady dividend payments. Higher rates could make utilities less attractive compared to bonds. So, we usually see a sell-off in utility stocks. Investors turn to bonds to obtain higher yields when rates increase.

Currently, utilities yield 3.3%, which indicates a yield premium of ~120–150 basis points compared to the ten-year Treasury yields and broader markets. Southern Company (SO) and Dominion Energy (D) yield close to ~5%—way higher than the peer average. Southern Company stock is among the top utility gainers in 2019. The stock has risen ~30% year-to-date.

Read XLU: How Did Utility Stocks Fare Last Week? to learn more