We are mostly in a world where many investors are now just willing to settle for a “return of capital” rather than a “return on capital.” Still, retirees and investors who rely upon income do not want to eat away at their cash balances while the government pays only 1.50% for a ten-year Treasury Note and only 0.65% for the five-year Treasury Note. Certificates of Deposit are where investors have generally gone to find higher income in the past, but CD rates are often just 1% at best now and that is for a multi-year rate today. The bond and CD investors are still moving into utility stocks to replace the income stream.
In many cases, investors can still get close to a 5% dividend yield in their utility shares. The volatility is generally low, the income predictability is generally high, and utilities by and large are extreme beneficiaries of very low interest rates due to their borrowing costs being so low. A 5% dividend from low-volatility and from proven models, or a 1.38% average CD yield on a five-year maturity (according to Bankrate.com)… if you are a retiree or an investor who has to live off of income from investments, it is easy to see why utilities are the next CDs.
The long and short of it is that this extremely low rate environment will force retirees and near-retirees to deplete their life savings just in order to live if they do not look elsewhere. The trick is for investors to find the utilities where the dividend is safe ahead and those which generally have fairly low volatility. To prove the point, the DJIA is down 10% from the 52-week high and has just gone negative for 2012. Most of the major utilities are down only 2% or 3% from their 52-week highs and some have just hit those highs recently.
24/7 Wall St. has compiled a list of the key liquid exchange-traded funds and a closed-end funds for investors who want more diversification than just one company or a few companies. We have also screened out three of the top electric utility stocks for retail investors that offer the following minimum criteria: $5 billion in market value, a 4% or higher yield, not trading at a 52-week high but also not down more than 10% from the highs to avoid the troubled players and which still have implied upside to the consensus analyst price targets from Thomson Reuters.
We have also included some of the key water utilities here this time. The yields on average are about 1% lower, but they are still about double that of the 10-year Treasury. Water utilities also have a near-zero chance of competition coming in from deregulation like the power companies have in some markets. These are also investments that are considered highly appropriate for widows and orphans.