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Utilities – Okay, Even When Rates Rise

Most market pundits expect the Federal Reserve to raise interest rates in December. As usual, that news triggered fears that the rate hike would set off a drop in utility and other dividend payers share prices.

Consequently, utility share prices have dropped around 10% since their early-July peak. But in my view, that knee-jerk reaction has created a buying opportunity. 

Utilities Prosper When Rates Rise

Research that I detailed the last time interest rate paranoia struck, a year or so ago, found that utility dividends and share prices typically increase when interest rates rise. Why?

The Fed raises interest rates only when it sees signs that the economy is growing. The Fed would not raise rates in a flat or shrinking economy. Like many other industries, utilities prosper in a strengthening economy because their customers are buying more natural gas and electricity. Moreover, even if this time is different, the Fed would probably only raise rates by a quarter-percent, which is hardly worth talking about.

If you agree, you should consider adding utilities to your portfolio.

How to Find the Best Utilities

Here’s how to use the FINVIZ (www.finviz.com) stock screener (program that scans the market for stocks meeting your specifications) to find worthwhile candidates.

Start by selecting Screener on the Finviz home page, and then, on the Filters bar, click “All” to see the available screening filters. For each filter that you use, click on the associated dropdown menu to select a search value. 

Use the filters in the top row to select the Utilities Sector and USA (Country), which limits your list to U.S.-based utilities.

Next, use the Dividend Yield menu to specify a 3% minimum dividend yield. Then, limit your list to most profitable utilities by specifying “Over 5%” for Net Profit Margin.

Institutional investors, such as mutual funds, have people that spend their days analyzing financial statements. So work smarter, not harder, by piggybacking on their efforts. Specify “over 70%” for institutional ownership, which will limit your list to the utilities most favored by the big players. Cut your minimum to 60% if you want to see more utilities.

Market analysts publish buy/sell ratings on stocks that they cover. Finviz organizes those ratings into strong buy, buy, hold, sell, and strong sell categories. Since analysts are usually overoptimistic to begin with, avoid stocks that they don’t like by specifying, “buy or better” on the Analyst Recommendation menu.

Screen Results

My screen turned up four utilities. Here's a link you can use to find out which utilities the screen is turning up today.

Allete (ALE) serves electricity customers in Minnesota and North Dakota. Its dividend yield is 3.7%.

Eversource Energy (ES), serving Connecticut, Massachusetts, and New Hampshire, is an energy distributor, meaning that it sells energy generated by other firms. Dividend yield: 4.4%.

PPL Energy (PPL), one of the largest utilities, serves 10 million customers in the U.S. and in the U.K. Dividend yield: 4.7%.

WEC Energy Group (WEC) serves Wisconsin, Illinois, Michigan, and Minnesota. Dividend yield 3.5%.

As always, consider these utilities to be research candidates, not a buy list. The more you know about your stocks, the better your results.

published 10/19/16

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