The Dow Swings for Record Highs and Misses; Why Utilities Are Crushing the Market

Even as the Dow Jones Industrials failed to set a second all-time record high in 2014, the Dow Jones Utilities have set records on six different occasions and are sharply higher for the year.

May 8, 2014 at 4:30PM

The Dow Jones Industrials (DJINDICES:^DJI) missed out on its bid to set a new all-time record high, giving up more extensive gains from earlier Thursday, and closing the day with a gain of 32 points. Many investors pay close attention to the Dow as a benchmark of the broader stock market, given that it has components that come from nearly all of the economy's different industries. But even as the Dow Jones Industrials have had a tough time staying close to the break-even point for the year, the Dow Jones Utilities (DJINDICES:^DJU) have had an incredibly strong performance, setting six new record all-time closing highs during 2014, and enjoying double-digit percentage gains a third of the way through the year.

^DJI Chart

^DJI data by YCharts.

Why utilities have soared
When you look at the components of the Dow Jones Utilities, you'll find that the biggest gains have come from a stock that has struggled in recent years. Exelon (NYSE:EXC) has risen more than 35% this year, as the nuclear-power specialist has finally gotten some relief in the form of higher natural-gas prices. Exelon relies on higher fossil-fuel costs in order to give its nuclear power plants a competitive advantage, and rock-bottom natural-gas prices in the past few years limited Exelon's opportunity to provide cheaper sources of power.

Source: Exelon.

Meanwhile, Public Service Enterprise Group (NYSE:PEG) has seen the potential benefits from capital spending, and has put its money where its mouth is with plans to spend $12 billion on projects during the next five years. Given its role as part of power-grid operator PJM Interconnection, Public Service needs to make sure that it does its part to maintain transmission lines, switching stations, and other key elements of the grid infrastructure in order to sustain the health of the grid, even as demand steadily increases. Its stock has risen 26% since the end of 2013 as investors assess its ability to profit from the trend.

More broadly speaking, utility stocks tend to be tied to interest rates and, so far in 2014, rates haven't behaved anything like what most investors had expected. With the Federal Reserve scaling back on its bond purchases, it was natural to think that rates would rise, and that should have hurt rate-sensitive utilities. But rates have actually dropped so far this year, and the attractiveness of utility dividend yields has driven further investor demand for their shares.

Given the high levels of regulation that most utilities function under, investors shouldn't expect the Dow Jones Utilities to provide the same growth that the Dow Jones Industrials offer. But for those looking for a solid set of businesses with ample and stable dividend income, the Utilities might well be a better bet than the Industrials, even as utility stocks hit record highs.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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