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Are Utility Stocks Still Good For Retirement?

Utility stocks often form the backbone of a stock-based income-oriented portfolio. Especially in the case of regulated utilities, this makes a lot of sense. State regulations dictate rates, and thus companies’ returns on equity. Baked into all of that is usually a dividend--and even a modest level of dividend growth--that can be counted on year in and year out.

In a low-interest-rate environment like the one we’re in now, such equity investments have (not surprisingly) been in high demand. This means that, on the whole, their stocks have been pushed to record highs in recent years.

The Dow Jones Utility Average is up about 20% in the last 12 months. Graph: MarketWatch. Data through 11/8/17.

But when stock prices go up, yields generally go down. If you bought into some utility stocks a while back, your yield on cost might look pretty good. Over the past 10 years, the median yield for the sector has been around 4%. Right now, though, it’s closer to 3%.

For most income-oriented investors, that’s not going to cut it. Even without speculating about the direction of interest rates, which is largely a fool’s game, a 3% yield on utility stocks is too low.

If you do insist on speculating about interest rates, you’re probably thinking they’re going to go up, not down. And when interest rates go up, the prices of utility stocks on normally go down. This has to do with the relative attractiveness of fixed-income investments to utilities (higher interest rates makes bonds more “competitive” as an investment), as well as the narrowing of the spread between treasury bill yields and utility companies’ returns on equity that will likely happen as a result.

At that point, utility dividend yields should get back to their long-term averages. In the meantime, though, where can you find some better-paying stocks?

We have some ideas. The following companies are longtime dividend payers trading with dividend yields that are higher than their most recent five-year average dividend yields.


Company

Symbol

Current Yield

Five-Year Avg Yield

Compass Minerals

CMP

4.4%

3.0%

GlaxoSmithKline

GSK

5.9%

5.5%

Interpublic Group

IPG

3.7%

2.1%

ONEOK

OKE

5.4%

4.8%

Public Storage

PSA

3.8%

3.1%

Spectra Energy Ptrs

SEP

7.0%

5.1%

WPP

WPP

4.8%

2.6%

Data as of 11/16/17.

(OK, we cheated and threw a utility in there. There are still a few utility stocks out there with a good yield and a reasonable valuation.)

Running The Numbers

For the most part, these stocks are value oriented, just like most utility stocks. This means that, if you have a value-oriented portfolio to start with, swapping out utility stocks for stocks like these should not change the portfolio’s prognosis all that much.

Figuring out that prognosis should include, by the way, running a Monte Carlo simulation on your plan. Monte Carlo is a great tool for estimating the probability of certain outcomes--like the probability of a retirement plan succeeding.

In recent years, with fixed income yields as low as they have been, income-oriented investors have had to get creative. Utility stocks have been one solution, but it could be time to look at other possibilities.


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