The theory regarding utility stocks to buy is relatively simple. These companies usually include strong economic growth paired with a solid labor market that was expected to trigger rising inflation. The Fed was supposed to stand against rising inflation with rate hikes. Fixed income yields were thought to rise. Utility stocks, which were long viewed as bond substitutes in an era of ultra-low interest rates, were supposed to fall.
The U.S. economy is very strong right now and second quarter GDP rose 4.2%. The labor market is also filling up. Unemployment dropped below 4% in July. On another note, inflation isn’t all that big, running around 3%, and while the Fed is boosting rates, the 10-Year Treasury Yield has been stuck in neutral below 3% for several months.
As a result, utility stocks haven’t lost their shine. With inflation relatively contained and fixed income yields stuck in neutral, stocks in utilities are still attractive assets to own for yield hunters. That is why after a big drop to start 2018 amid a soaring 10-Year yield, the Utilities Select Sector SPDR ETF (NYSE: XLU) has rallied more than 12%.
Although inflation isn’t soaring higher and that’s a result of technology leaders that are pushing down inflationary pressures. This trend won’t change any time soon, and therefore, inflationary pressures should continue to be subdued for the foreseeable future. With those forces subdued, utility stocks have room to rally.
Utility Stocks to Watch: American Electric Power (AEP)
Considered one of the industry’s heavyweights, American Electric Power (NYSE: AEP) is a massive electric utility company that delivers electricity to more than 5 million customers across eleven states.
The business right now is doing pretty well. Hotter than normal weather so far in 2018 has buoyed operations for the past several months, and robust economic strength in the company’s core markets has also boosted the business. Overall, sales and earnings are both trending higher at a healthy rate.
Utility Stocks to Watch: Sempra Energy (SRE)
Sempra’s business is doing well right now. Both revenues and earnings are trending higher amid a favorable economic backdrop. Plus, the company is continuing its energy diversification efforts by expanding its liquid natural gas (LNG) business, something which the company feels can help fuel sustainable long-term growth.
Utility Stocks to Watch: Duke Energy (DUK)
Much like the other names on the list, Duke’s businesses are stable and healthy at the present. Much of this has resulted from unusually hot weather and strengthening economic conditions, Duke’s revenues and earnings are consistently higher at a slow and stable rate.
On the yield side of things, DUK stock has a 4.5% dividend yield, which is one of the more attractive yields in this space. Historically speaking, DUK stock peaks when that yield dips below 4%. Thus, from a historical viewpoint, DUK stock has plenty more firepower to head higher.
