Before I make my broader point, here’s a LINK to quite the interesting comparative interactive chart. It shows the utilities ETF, symbol XLU, versus the well-known ETF for the S&P 500, the SPY. You can click on various time frames on the “Range” tab found underneath the XLU title to look at different time frames. Even without including the dividend yield advantage that XLU has had over SPY, it has beaten it over all ranges from 1 day through “max”. Plus, XLU has been less volatile.
This difference has become extreme. The P/E ratio for XLU is listed as 15; that for SPY as 14. But it is presumed that the ’500′ will grow earnings a good deal faster than utilities, which barely grow at all.
A conundrum?
Yes, it’s a bit of one.
The DoctoRx-planation is that unlike in the 1950s and 1960s, when younger and middle-aged individuals did a great deal of America’s investing, nowadays the investable wealth is largely in hands of the more geriatric set. They (we) want safety of principal. And, in the world of ZIRP we want to nail down some yield. And compared with the 2.7% yield on a major REIT such as Simon Property Group (SPG), which must by law pay out at least 90% of its earnings as dividends, the 3.9% current yield on utilities, which have a high but lower payout ratio than REITs, looks quite the bargain.
Also interesting is to compare the returns since 2001 from a plain vanilla long-term tax-exempt bond fund with the SPY (identical over that time frame). LINK
Basically they have been same, except the muni fund has been vastly stabler in price and has had a higher gross yield, plus it’s been exempt from taxes.
In other words, who needs low-yielding stocks with no security of principal?
Any public equity you buy is pre-owned, in which the seller may well be an institution that knows much more about the stock it is selling to you than you do; or it is an IPO (or the occasional secondary offering). For which, see FB.
Thus it remains my contention that for the market as a whole, there will be the same sort of tendency amongst investors that there was after the Hoover period. Stocks will just have to prove themselves. We understand that the Great Recession was, well, great. But the idea that a truly mild recession as occurred in 2001 could be associated with a massive stock crash, and that a recovery year the next year could also be a big down year in stocks– and that the bottom of the big down recovery year would be undercut 6-7 years later, rankles a lot of people. Besides not being all so well off generationally, trust me, younger people today are a bit afraid of stocks. Many of them just see them as a scam and not worth the trouble and risk.
Now, this sort of thinking has already created some decent stock market buys. But I only see the best of them as good but not compelling. I am long lots of utilities in my personal and managed accounts (including XLU), as well as munis. I have no idea what the twists and turns of our highly leveraged economic system will do. Worse, I have no confidence that a strong economic year will be followed by another strong one. Or, vice versa. When I can see a 30%+ one-year return in Con Ed simply by a yield reversion to 3% simply to justify its yield relationship with Treasurys and munis, why do I need to take a greater risk with tech or what-not? Basically, Con Ed (for example, and I am long the stock) has enough risk. There is operational risk and of course interest rate risk, plus general stock market risk. For example, the stock fell a great deal in price during the meltdown a few years ago, which Treasurys rose in price.
Despite the modest drop recently in the stock averages, I continue to fail to see the margin of safety to tempt me into much in the way of “gr0wthy” stuff. Not that they’re not going higher- I think they trend higher over time. But my level of confidence is low in any such prediction.
Yours truly is not unique. This sort of thinking is turning plain vanilla utilities in the new momentum stocks.
Who could have imagined this back in the go-go ’90s?
Meanwhile, the utilities index tends to go lately on the risk-on days, such as the last two days, and hold steady on the risk-off days, such as many other days plus the last hour of today’s (Thursday’s) trading.
That sort of price action is about as good as you can ever ask for.
I have found that individual electric utilitiy companies offer the best of yield, low risk and capital appreciation, in particular DUK WEC PGN SO SCG. These five companies provide an average yield in the 4 percent range yet are able to show significant price appreciation for all periods from a week, three months, six months, year, two years and five years. The two year period includes the market downturn when Standard & Poors dropped US Credit Rating and the five year period includes the market lows of 2009. During both period, while the markets dropped like rocks, the five mentioned electric utility companies not only fell substantially less by comparison, but also recovered far more quickly, going on to make substantial gains in the process.
The problem with most dividend paying stocks, including utilities, is that while you receive a nice dividend yield, by comparison the equity prices drops as much as 30 percent and more. The five do not. When choosing stocks with low BETA, be sure to check both down periods in comparison to the SP-500. THis is the only true way to guage a stocks ability to withstand a downturn.
Uncertainty surrounding tax handling of dividends in 2013 is worth mentioning with regards to valuation.
Agree with both comments. In fact, one of my concerns about the general stock market is that if the SPY yields 2%, years of dividends and some appreciation can be washed away, at least temporarily by an “average” recession in which, I am told, a typical bear market involves a 30% peak-trough drop.
Personally I own utilities in self-directed IRAs.
ED up 0.92% today, SPY up 0.80%. Quite the strange bull move…