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Quarter-End Insights

Utilities: Starting to Look Attractive After a Woeful 2015 Start

Utilities' 4% dividend yields still look attractive even with the chance for rising interest rates.

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  • U.S. utilities are down 9% year to date and have underperformed the S&P 500 by 12 percentage points through early June, marking the sector's worst stretch since the 2008-09 market crash.
  • After Morningstar's utilities valuations hit an all-time high at the end of January, the sector now trades near fair value. Utilities even trade at a slight discount to Morningstar's overall market valuation.
  • Outside of the eurozone, utilities' fundamentals remain strong, with moderate payout ratios, solid balance sheets, and a bevy of high-quality growth opportunities.
  • Utilities' 3.6% average dividend yield as of mid-June is still historically attractive relative to 10-year U.S. Treasury yields, even after the recent bond sell-off. The spread between interest rates and utilities' dividend yield has closed to 110 basis points.

After nearly 18 months of waiting, it's finally time to take a look at utilities again. The sector's swoon since January has created a long-awaited opportunity for income investors. Several high-quality utilities with long histories of growing dividends, strong balance sheets, and attractive growth prospects now trade well within buying range based on our fair value estimates.

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