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Stock Strategist Industry Reports

Utilities' Dividends Still Best of Breed

Valuations are rich, but sector finances and growth are super strong.

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Although utilities' valuations appear historically rich, the sector's financial health, dividend growth outlook, and relative yield are as good as they have been in decades. Long-term investors searching for secure income that can grow faster than inflation should consider some of these highlighted utilities as long as they're willing to take some risk that the sector will underperform the market in the near term if interest rates start climbing.

The utilities sector's yield paradox is sending mixed messages. On the one hand, the sector appears overvalued, trading at a 13% premium to our fair value estimates, an 18 price/earnings ratio, and a 3.5% dividend yield, which is below the sector's long-term average. However, income investors should like that utilities' average dividend yield still represents a historically attractive 132-basis-point premium to the 10-year U.S. Treasury yield.

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Andrew Bischof does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.