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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.

Travis Miller
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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.

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

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