Utilities stocks can provide reliable dividend payments that make them safe income-generating investments for investors close to retirement. But with the Federal Reserve poised to raise interest rates this year, are utilities the best place to invest for growth?
In this clip from "The Rank" on Motley Fool Live, recorded on Jan. 31, Fool.com contributors Jason Hall, Dan Caplinger, and Matthew Frankel, CFP®, discuss how they think the utilities sector will fare in 2022.
10 stocks we like better than Walmart
When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Stock Advisor returns as of 6/15/21
Matt Frankel: With that, we'll move onto our No. 10. This is 10 out of 11. This is the utilities sector. Utilities are considered a very safe bet. Going into a turbulent market like we are now, a lot of investors want safe stocks, but we ranked this pretty low. We'll start with Dan on this one. Dan, give us your quick take on the utilities sector and this was your No. 11, so why'd you rank it so low?
Dan Caplinger: Utilities, I think more than any other sector are highly interest rate sensitive and I find myself on the high end of expectations as far as where interest rates are likely to go this year. I think that the Fed has come out of the gate with its most hawkish tone in years. We've seen inflation really rising, and so those higher rates, they tend to knock utility stocks down more. Unlike some other interest rate sensitive stocks that are able to offset those impacts with pricing efforts and other things. Utility rates are largely regulated and set by government regulators, and so their ability to respond to more adverse environments for interest rates, they're less able to react positively to try to adjust their business models in order to do that, and that's why it gets my lowest rating. I think that we'll find -- I've called it every year for probably 12 years now, but I think this is finally the year we get a marked rise in interest rates.
Jason Hall: That just happens to correspond at a time when utilities are yielding, and this is the sector ETF, the SPDR Utilities Sector ETF, so this is S&P 500 utility companies, 2.92%. This is going back over the past decade. That's just about the lowest yield you were getting out of the sector, which means that investors are paying a premium for the stocks right now going into this potentially long secular dividend or the yield interest rate increase that Dan was talking about, that's a perfect storm for underperformance.
Frankel: I will say that if I were retired or close to being retired, I might have ranked utilities higher. They are a safer income stream. If your main goal's investment income, it's hard to call any dividends safer that as a whole than the utility sector. I might've ranked it --
Hall: It's the entire thesis for owning these companies.
Frankel: Right. I might have ranked it a few notches higher if I were say, 60 instead of 40. I ranked it pretty low. I was actually the most bullish on utilities. I ranked this No. 9 out of 11. It's because it has some ability to keep up with inflation. Not great like Dan was saying, a lot of these are regulated, have limited pricing power. But that's where I stand on it.
