Travis Miller: 2014 has been a tale of two halves for utilities. The first half of the year, they rallied sharply; then they had the summer swoon between June and August. And since then, in the last month, they've rallied sharply again, outperforming the S&P 500. That leaves utilities up 15% in 2014--better than the S&P 500--and recovering from the poor performance, on a relative basis, that they had in 2013.
So, where does that leave us? Well, the dividend yield still looks attractive at about 3.9% for the sector, although that is below the 20-year average. And it does still look attractive relative to 10-year Treasuries at 2.5%. So, there's uncertainty here but still good yield opportunities for investors looking for income. We think the sector is in the best financial health and growth situation that it's been in in a decade or more.
Of that sector, we like Southern Company (SO)--that's one of our top picks right now. Yields 4.8%, well above the sector average; good growth opportunities; trades at $45 per share, which is in line with our fair value estimate. We also like Duke (DUK) and Public Service Enterprise Group (PEG), among the highest-quality utilities all trading with dividend yields above 4%, with very good growth prospects and a high-quality asset group.