Utility Sector Is In The Sweet Spot; XLU Is The Best Way To Play It

Includes: XLU
by: David Vomund

With interest rates near historic lows, U.S. Treasurys provide very little income. Two-year notes yield 20 basis points and five-year Treasurys yield just 84 basis points. Those seeking income need to look elsewhere, which is why utility stocks and their four percent divided yield are in the sweet spot. That explains their strong performance. In spite of all the market volatility and economic worries, utility stocks are up for the year, and not by a small amount.

Rather than buying individual stocks, it’s safer to buy the Utilities SPDR (NYSEARCA:XLU), an ETF that holds all the utility stocks in the S&P 500 index. It has a very attractive yield of 4.5 percent, plus many of its holdings are increasing their dividends.

Utility stocks typically underperform other sectors when the economy is booming and the market is doing well. They are better suited for a slow-moving economy, such as today’s. The companies are less sensitive to the economy than most and many are monopolies in their regions.

Another tailwind is consolidation. There are half as many electric utility companies today as there were 50 years ago. It’s expected that ten years from now there will be half as many companies as there are today. Many will be acquired at premium prices.

The attractiveness of the utilities sector is best seen in how fast it recovered from the early August selling. Whereas nearly every other sector is near its August 8 low, the Utilities SPDR recovered all of its losses and is at the upper end of its price range.

Yes, utility stocks are dull and their four percent yield doesn’t sound like much, but given the market’s unprecedented volatility and the near zero interest rate environment, this slow-moving sector is providing shareholders with the income they need to meet their investment goals while offering potential capital gains. For many, that will make utilities a win-win investment. The XLU is a good way to participate.

Disclosure: I am long XLU.