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Utilities: Repeating a Stellar 2014 Performance Will Be Tough

Utilities' 23% total return through mid-December topped all sectors except for M&A-fueled health care.

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  • Utilities lived up to their reputation as bond substitutes in 2014. The Morningstar Utilities Index total return was 23% through mid-December, in part helped by interest rates that fell 30% during the calendar year.
  • Relative to fixed-income substitutes, utilities remain an attractive yield investment. As of mid-December, utilities' average dividend yield was 3.7% compared with a 2.1% yield for the 10-year U.S. Treasury. This remains a historically high yield premium even though utilities' average dividend yield is below their 4.5% long-term average yield.
  • Frustration in Europe on all sides of the energy debate is leading to policy rethinks continentwide. The U.K. took the most aggressive step by instituting a capacity market starting in 2018. Successful implementation could spawn followers, providing a competitive lifeline to most of the beleaguered European utilities.
  • Eastern U.S. power and gas markets have settled since last winter's polar vortex, but policy changes to avoid a repeat will lock in long-term benefits for some power producers. Wide-moat  Exelon (EXC) should be a key beneficiary if the Federal Regulatory Energy Commission approves proposed capacity market changes.

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