Our outlook for utilities stocks

Interest rate fears leave several high-quality dividend-paying utilities looking cheap.

Travis Miller 4 October, 2013 | 6:00PM

After scorching returns during the first four months of 2013, regulated utilities have underperformed every sector in the United States except real estate since April, down 9%.
Even through the ups and downs of interest-rate outlooks, the utilities sector average dividend yield continues to hover around 4%.
Recent coal and nuclear plant closures highlight the competitive threats in wholesale power markets from low natural gas prices and renewable energy incentives.

Given utilities' sensitivity to interest rates, the sector continues to swing violently as U.S. monetary policy hawks and doves circle overhead. A group of the 31 largest U.S. regulated utilities--those most exposed to interest rates--outperformed every sector with a 20% total return between January and April as interest rates remained near record lows. Interest-rate sentiment then shifted sharply, Treasury yields climbed rapidly, and regulated utilities underperformed every sector except real estate, down 9% between May and August. Still, the spread between the utilities sector's 4% average dividend yield and 10-year U.S. Treasury rates remains well above its 20-year average, suggesting utilities still offer solid risk-adjusted returns even if interest rates keep rising.

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Travis Miller

Travis Miller  Travis Miller is an energy and utilities strategist for Morningstar.

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