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At The Dividend Dance Its Time To Change Partners - Buy Old Biotech, Sell Utilities

Utilities have been on a roll up over 15% since the first of the year.

Biotech stocks have taken a beating as elections near, down over 15% since the first of the year.

Biotech offers dividends higher than most utilities, with more growth.

Overview:

Large biotech stocks have generally been in a downward trend for the last 9 months as politicians focus on the cost of drugs and the November elections come into focus. On the other hand, utility stocks have rallied considerably since the beginning of the year. Both groups now have similar dividend rates, but different growth potential.

In a previous article, I took the same approach, except with what I call "Old technology". In the article, "Buy 'Old Tech' Stocks, Not Utilities", I compared large, financially strong tech stocks with utilities, postulating that an investment in the high-dividend tech stocks would be a good idea, because they have more growth potential than utilities.

In this article, I will conduct a similar comparison, except with what could be called "Old Biotech" stocks.

"We dance round in a ring and suppose,
but the secret sits in the middle and knows."

- Robert Frost

Source: plancksconstant.org

Comparing old biotech to utilities

A quick look at this chart comparing iShares Biotechnology ETF (NASDAQ:IBB) to the Dow Jones Utility Index (DJU) shows you what I mean. Since July 15th, 2015 the utility index is up about 17% and the Biotech Index is down more than 30%. This divergence has caused the dividend rate to increase significantly for old biotech vs. utilities. Sure looks like an opportune time to switch positions.

Source: MarketWatch

The future looks better for biotech than for utilities

Biotech is not without its problems. First, the political pressure to lower drug prices has reached a crescendo with the US election cycle being in full swing. Secondly, expiring drug patents is a continuing headache for every drug company in the world. But offsetting these problems is the huge expanding worldwide market for old and new drugs that will increase sales by $349 billion by 2020...


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