In a time when fear and uncertainty are causing the stock market to run on a rollercoaster ride, the attractiveness of the utility sector remains intact and for good reason.
In general, the utility sector is known for shooting off decent dividends and carries a relatively high degree of safety. The sector remains a safe haven and tends to shine in times of uncertainty because the services that it offers are an indispensible part of life, enabling utilities to have a reliable earnings stream.
Another reason utilities remain attractive is because they have overcome many of the regulations that once hindered their performance by driving up operational costs.
Additionally, in a low growth environment, which the U.S. currently is in, utilities provide a yield that is greater than their debt, further boosting their appeal. Currently, major utility players are generating yields north of 5%.
Lastly, there doesn’t seem to be much improvement in the overall health of the U.S. economy. The expiration of the homebuyer tax credit and an abundance of supply are putting a damper on the real estate markets; unemployment levels remain stubbornly high and don’t seem to be improving; consumer confidence remains wary in both the current state of the economy and where it is heading in the near-term future, and the Federal Reserve is keeping interest rates at all time lows, spurring the fear of deflation.
Some diversified ways to gain access to numerous utilities like Exelon Corporation (EXC), Southern Company (SO) and Dominion Resources (D), include:
- The Vanguard Utilities ETF (VPU), which has a yield of 3.96% and closed at $60.30 on Tuesday.
- The iShares Dow Jones US Utilities Sector Index Fund (IDU), which has a yield of 3.99% and closed at $69.22 on Tuesday.
- The Utilities Select Sector SPDR (XLU), which has a yield of 4.38% and closed at $28.44 on Tuesday.
When investing in these ETFs, it is equally important to do so with caution. A good way to implement this is through the use of an exit strategy which identifies specific price points at which a downward trend is highly likely to occur.
According to the latest data at www.SmartStops.net, the price points are as follows: VPU at $59.93; IDU at $68.79; XLU at $28.12. These price points change on a daily basis and are reflective of market conditions.
Disclosure: No Positions