Utility Stocks: Ain’t Misbehavin’?
Utility Stocks (as a group) have forsaken me this year by advancing only about one-fifth of the amount of the S&P 500… which can act as a real short-term boat anchor in your portfolio if you own any quantity at all. Yet, my passion for the sometimes stodgy “dividend machines” still burns hot.
Why? First, there’s the cash flow. My favorite utilities ETF, the Utilities Select Portfolio (XLU) is spinning off a 4.31% dividend yield in an environment where a half a percent is doin’ good on your money market. That’s worth taking a little bit of market risk.
Then there’s long term performance. The Dow Jones Utility Index has outperformed the S&P 500 by 4.4% PER YEAR over the last 10 years. This puts the DJUI in positive territory for the last 10 years, whereas the S&P 500 is down almost 20% for the same period. And we are supposed to be long term investors, right?
Then… What’s the problem? Why the dismal performance?
To answer the questions, I think we have to look at it in context of what utility stock underperformance might be saying about the economy in general. The last time we emerged from a recession, the utility averages advanced about 25% in the first year of the recovery (2003). This time, they have only advanced about 4%. My opinion is that there’s nothing wrong with utility stocks per se, but they might be telling us that there is still something wrong with the economy.
Mix this in with the failing dollar, gold hitting all-time price highs, and oil’s recent jump back to the $78 per barrel neighborhood and there’s plenty of evidence afoot to suggest that all is not “right” in the realm.
There are so many variables out there that even Helicopter Ben doesn’t have a real clue. Bernanke (at the moment) must be contented to just dump cash on the U.S. economy and hope for the best… while walking the tightrope.
We have the early indicators of inflation that gold, oil and utility stocks might be showing us on the one hand while we have the deflationary pressures that come with collapsing employment, a housing value slam with a possible double-dip and consumer spending that has all but evaporated.
So, I think utility stocks really ain’t misbehavin’… I think they’re trying to tell us something about the economy. And if I’m hearing them correctly, I think I’d rather lie with my lovable dogs (of late), than to be all loaded up on or still chasing after “recovery” stocks.
