Utilities have always been attractive given their high yields and relatively low correlations to the market. Furthermore, utilities have provided consistent growth and reliable dividends over the years. In today's low interest rate environment, investors look more to dividend stocks for current income given the anemic yields on other financial products like money market accounts, CDs and even bonds.
However, utility stocks do put more on an investor's capital at risk than these other options. Due to this, it is worthwhile to look for utility stocks that also provide some diversification benefits as well. I will limit this article to the following utilities:
Select Electric Utilities
|Ticker||Name||Last Close (August 19th)||Market Cap ($ Billions)||Div. Yield %|
|SPY||SPDR S&P 500 Trust ETF||112.64||NA||2.2|
|XLU||SPDR Select Sector Fund - Utilities||32.39||NA||4.0|
|SO||Southern Company (The)||39.97||33.9||4.7|
|D||Dominion Resources, Inc.||47.99||27.6||4.1|
|DUK||Duke Energy Corporation||18.24||24.3||5.5|
|NEE||NextEra Energy, Inc.||54.29||22.9||4.1|
|AEP||American Electric Power Company, Inc.||37.06||17.9||5.0|
|PCG||Pacific Gas & Electric Co.||41.19||16.4||4.4|
|PEG||Public Service Enterprise Group Incorporated||31.62||16.0||4.3|
|ED||Consolidated Edison Company of New York, Inc.||54.36||15.9||4.4|
|PGN||Progress Energy Inc.||46.49||13.7||5.3|
|XEL||Xcel Energy Inc.||23.31||11.3||4.5|
|DTE||DTE Energy Company||47.51||8.0||5.0|
|CNP||CenterPoint Energy, Inc (Holding Co)||18.73||8.0||4.2|
|CEG||Constellation Energy Group, Inc.||36.74||7.4||2.6|
|WEC||Wisconsin Energy Corporation||30.16||7.0||3.5|
|TE||TECO Energy, Inc.||17.15||3.7||5.0|
|POR||Portland General Electric Company||22.55||1.7||4.7|
|AT||Atlantic Power Corporation||14.25||1.0||7.7|
Source: data provided by Zacks.com premium services, Yahoo!Finance, and author calculations.
The analysis will focus on which of these utilities provide the lowest correlation to the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) and also adjust for which ones have the highest dividend yields. This article will not consider valuation aspects of these companies. It should also be noted that some utilities are regulated, some are deregulated, and some provide both regulated and deregulated services. EXC is one example with both regulated and unregulated divisions with Commonwealth Edison in Chicago and PECO in Philadelphia. DUK and PGN should have the same correlation since the two are currently seeking a merger where each share of PGN will be converted to approximately 2.6125 shares of DUK. EXC has also announced that it will acquire CEG.
The following table shows the 36 month correlations and volatilities between these utilities and SPY:
Correlations to SPY
|Ticker||Correlation 36 months||Volatility 36 months||Ratio to SPY|
Source:derived from Yahoo!Finance monthly split and dividend adjusted prices.
The first observation is that volatility and correlation are unrelated, which one would expect. EIX, TE and POR all showed very high correlations, while ED, PCG, and WEC all had very low correlations. These last three stocks also had very low volatilities which suggests that they would provide the most diversification benefit to an SPY portfolio. It is a simple step to calculate the volatility of a portfolio composed of two securities when there correlation coefficient and individual volatilities are known.
The following table ranks the stocks based upon the lowest volatility for a portfolio that is 50% SPY and 50% of each of the tickers, including XLU.
|Ticker||Volatility of 50% SPY 50% ticker portfolio|
Source: Author Calculations
The portfolios with TE and CEG have higher volatilities than just SPY due to their high volatility and relatively high correlations. As expected, the three best utility stocks for diversification benefits are ED, WEC, and PCG, which was the best overall stock. SO and PGN also performed well by this measure. PGN should be interesting given that it also has the highest dividend yield among the top 5 stocks for diversification.
Disclosure: I am long SPY.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.