This rally has been vicious. I know there are plenty of individual investors -- not to mention professionals -- scratching their heads and blaming themselves for not buying more aggressively in early spring. The market has not given you many chances to get in.
The way I see it, however, if you buy quality businesses with good growth prospects, you will do well in the long run. Yet investors in one high-quality sector haven't enjoyed any of the rally's run-up. Utility stocks have massively underperformed the stock market. The natural question to ask is: Why?
Behind the junk rally
So far during this rally, the lower the quality of the stock, the higher its return has been. Yet in many cases, the inverse has also been true -- good stocks have done badly.
In theory, of course, it should be just the opposite. You don't have to search hard to see the junk that is flying: AIG
Utilities are defensive
The recession has certainly affected the utilities sector, despite the stable cash flows that utilities typically generate. As of the end of August, wholesale electricity prices in the Northeast had dropped to the lowest level in almost six years because of weak demand.
On top of the recession, the weather over the summer was relatively cool, further suppressing demand for electricity. But adverse weather conditions won't last forever, and the economy has been slowly improving. I expect utility stocks to stop underperforming now that business conditions are getting better.
I have mentioned Exelon
Exelon gave its investors major headaches with its hostile bid for NRG Energy
The stock trades at 12 times earnings, and with a yield of 4.2%, the company pays more income than 10-year Treasuries while giving investors dividend growth opportunities. I'm not worried about inflation at the moment, but I know a lot of people are, and dividend-paying stocks are one way to protect yourself when looking for income in a potentially inflationary environment.
Investable wind power
Environmentalists love FPL Group
That gives FPL Group a similar competitive advantage should fossil fuels become too expensive. And if climate legislation forces other utilities to spend heavily, the company already will have done much of the necessary planning. The stock trades at around 11.5 times earnings and yields 3.5%.
Finally, I really like Dominion Resources
There isn't much that's sexy about utility stocks. But, if you are looking for safety, reliable dividends, and peace of mind in a market environment that is highly uncertain, it could be just the right sector for you.
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