Utilities Show Extreme Disdain for Dividend-Yielding U.S. Stocks

Utility stocks and Treasury yields

Utilities and other stocks with relatively high dividend yields have fallen far enough out of favor this year to make them worth revisiting, according to Gina Martin Adams, an equity strategist at Wells Fargo Securities LLC.

The attached chart illustrates her point by comparing the Standard & Poor’s 500 Utilities Index to the yield on 10-year Treasury notes since the beginning of last year, a period in which they tended to track each other. The Treasury yield is inverted to highlight their relationship.

Utilities have performed the worst among the S&P 500’s 10 main industry groups this year as Treasury yields have climbed. The industry gauge trailed the broader index by 14 percentage points as of yesterday. The spread is approaching a 14.1-point shortfall in the last six months of 2013 -- the biggest first-or second-half gap since 2001, according to data compiled by Bloomberg.

“Investors are pushing the trade to extremes,” Martin Adams wrote. “Now may be a good time” to invest in utilities and other higher-yielding shares in the S&P 500, the New York-based strategist added.

Southern Co., CenterPoint Energy Inc., Teco Energy Inc., PPL Corp. and Entergy Corp. had the highest projected yields among S&P 500 utility stocks as of yesterday, according to data compiled by Bloomberg. All five were highlighted in the report, which also cited some energy producers, real-estate investment trusts and telephone companies.

“Equity performance has been highly sensitive to bond yields,” Martin Adams wrote. “No better example exists than the utilities sector.” The 10-year yield rose to 2.41 percent yesterday from a low of 1.64 percent on Jan. 30, reflecting anticipation that the Federal Reserve will start raising interest rates for the first time since 2006.

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