High-Quality Opportunities Light Up in Utilities Sector

For the first time in 18 months, investors can take a serious look at utilities again. The sector's sharp drop 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 prospects now trade well within buying range, based on Morningstar's fair value estimates.

The last time the utilities sector was this cheap was in 2013, when it briefly traded below fair value. Before that, utilities last traded below fair value in mid-2010. It has been a rapid fall for utilities this year since valuations peaked in January. The sector's 12% drop from its late-January peak is its worst stretch since the market crash in 2008.

Investors seeking 8%-10% total returns with long holding periods now have some high-quality options. Stalwarts such as

Domestic-utility fundamentals remain strong. We're forecasting median 5% dividend growth for the group during the next three years, with some utilities, such as

Going into the summer, we're keeping a close eye on eastern U.S. power markets. The long-developing wave of coal-plant shutdowns has accelerated this year as persistently low gas prices and noncarbon emissions regulations have had their effect. Regulators recently approved PJM's capacity-performance scheme to encourage power-generation reliability.

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