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With the threat of the Fed raising rates being taken off the table, it’s time to look at which stocks will excel in the low-rate environment for 2015.
Utility stocks have been on a tear this year as investors flock to yield in the low-rate environment. But worries about the Fed raising interest rates have some investors believing high-yielding stocks might not be as attractive going forward.
Those worries can be put to rest after last week’s Fed meeting.
As Fed chief Janet Yellen spoke, it became clear that low interest rates are here to stay – at least for now. Thus, with yields in the bond market potentially remaining low in 2015 and the average S&P 500 dividend yielding just under 2%, investors will keep their focus on dividend paying stocks.
And one of the best sectors in the market for high yields is utilities.
Utility companies are boring. But the reason to invest in them is the consistent – and often generous – dividends. The S&P 500 utilities sector offers a dividend yield that’s nearly double the average S&P stock. But utility stocks aren’t just offering above-average dividend yields. Lately, their stocks have been outperforming the market.
The S&P utilities sector index is up 25% over the last 12 months, while the S&P 500 is up just 14% over the same period. In fact, utilities are the best performing sector behind only health care over the past year. Should rates remain low as expected, utilities could be set up for similar outperformance in 2015.
With that in mind, here are a few utilities stocks to consider:
Utilities Stock No. 1: Southern Company (NYSE: SO)
Southern Company is one of the nation’s largest generators of electricity. Its primary markets are located in the Southeastern United States. It has been investing heavily in infrastructure over the years and should be a big beneficiary of the growing population growth and rebounding economics in the Southeast.
Its 4.3% dividend yield is the highest on our list. It has been consistently growing its dividend, with 13 straight years of annual dividend increases. What’s more, Southern Co. has paid a dividend for the last 60 years.
Utilities Stock No. 2: Duke Energy (NYSE: DUK)
Duke Energy operates regulated utilities, servicing states in the Midwest and Southeast. It also operates power generation facilities outside the U.S., in Latin America and Saudi Arabia. While it has been investing heavily in nuclear, natural gas and coal facilities, Duke Energy is also investing in renewables.
This included adding various solar assets in 2013. It also plans to spend upwards of $2 billion by 2018 in renewable energy (compared to the $5.6 billion in capital expenditures that Duke Energy spent last year).
This electric utility pays a 3.8% dividend yield and has upped its annual dividend for seven consecutive years. Duke Energy also trades at one of the lowest price-to-book ratio of our stocks listed, coming in at 1.4.
Utilities Stock No. 3: Exelon Corporation (NYSE: EXC)
Exelon Corporation operates in nearly every state in the U.S., along with operations in Canada. It is heavily focused on nuclear power, where it generates over half its energy. But it is diversifying toward renewables and natural gas.
Exelon Corporation trades at the lowest price-to-earnings ratio of our utility stocks listed, coming in at 15.5. It also trades at a price-to-book ratio of 1.4, with a yield of 3.3%. It has a relatively new streak of dividend increases, with just two years under its belt. But it has been paying a dividend for 34 years.
Utilities Stock No. 4: NextEra Energy (NYSE: NEE)
NextEra operates across 26 states, but generates the majority of its revenues from Florida Power & Light – the largest utility in Florida. What’s more interesting is that nearly all of Florida Power & Light’s power generation is from relatively clean sources —think: nuclear, natural gas and solar.
NextEra offers the lowest dividend yield of our utility stocks at just 2.7%. But it’s still more than you’ll get from the bond market or the majority of S&P 500 stocks. It also has a solid history of rewarding shareholders, having paid a dividend for 31 years. It has upped its annual dividend for four straight years now.
Utilities Stock No. 5: Utilities SPDR ETF (NYSEArca: XLU)
For the investor wanting to take a simple approach, there are utility ETFs. These securities present a more diversified way to invest in various utilities.
The Utilities SPDR is one of the largest ETFs in the space, with a $6.7 billion market cap. Its dividend yield is solid at 3.2% and it only trades at a price-to-earnings ratio of 7.9.
The top five holdings of the Utilities SPDR include Duke Energy, NextEra Energy, Dominion Resources (NYSE: D), Southern Co. and Exelon Corporation. Note that four of these stocks made our top utility list.
Another option is the iShares Dow Jones US Utilities ETF (NYSEArca: IDU). It offers a 2.8% dividend yield and is much smaller than the Utilities SPDR with a $750 million market cap. But it does trade with a price-to-earnings ratio of just 6.1. It’s worth noting that the iShares Utilities ETF has the same top five holdings as the Utilities SPDR.
The continued beauty of utilities is that people will always need energy no matter the economic environment. That, combined with the prospect of low interest rates being here to stay through 2015, makes the utilities stocks worth owning.
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