Utility Stocks Gain Edge in Power Play

By David Reilly, Wall Street Journal

Sure, the technology sector has the glitz and glamour nowadays, not to mention the biggest-ever U.S. initial public offering thanks to Alibaba’s recent listing. What tech doesn’t have is top stock-market performance.

At least not when compared with that most unglamorous of sectors: utilities. So far this year, the S&P 500 information technology sector index is up 7.1%; the Nasdaq Composite is up just 2.4%. Meanwhile, the S&P 500 utilities sector index has risen 13%.

That makes boring, old utilities the stock market’s second-best performing sector this year, after health care. The reason is twofold.

First, utilities, given their allure as dividend-paying stocks, tend to move in inverse relation with interest rates. And although the Federal Reserve is widely expected to begin increasing rates sometime next year, long-term bond yields in 2014 have confounded investor expectations. Rather than rising from the start of the year, as all Wall Street expected, they fell. That kept investors interested for longer in utilities’ dividends.

Second, utilities are habitually homebodies rather than international adventurers. That means U.S. utilities have benefited from the view that the American economy is growing stronger, while others, notably Europe’s, remain weak. This has also bolstered the belief the Fed will raise rates first, sending the dollar higher. Together, these have made U.S. assets even more attractive to overseas buyers.

Still, investors in utilities shouldn’t expect their day in the sun to last too long. Eventually, when the Fed begins to raise rates, their allure will dim, as dividend yields must adjust. Until then, stodgy investors can smugly remind tech-focused peers that without electricity, even the newest iPhone isn’t of much use.

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Utility companies make up 8% of the D2 Capital Management Multi-Asset Income Portfolio.  Current yield on the portfolio is 4.95% and year to date the portfolio is up 4.63% (as of 10 October 2014).

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.