Avoid a utility shock

Bond yields may soon be on their way up, and that has dimmed the prospects for utility stocks in the past.

Many investors own utilities for their fat dividend yields, and they look less enticing when bonds start to pay more.

Bernstein’s Hugh Wynne says most observers expect U.S. Treasury bond yields to rise by about three-quarters of one percent over the next year – but that expectation hasn’t yet been factored into the value of utility stocks. As a group, they appear to be priced higher than they should be, he says.

But some utility stocks may be less susceptible than others to rising bond yields. Wynne says mid- and small-cap regulated utilities, for example, typically do better than larger ones when 10-year Treasury bond yields are on the rise. That’s possibly because institutional investors tend to focus on the big utilities, so they feel it more when those big investors sell, Wynne says.

Wynne singles out the smaller utilities Ameren, SCANA, Pinnacle West and Alliant Energy as relatively safe options.

Utilities that are growing their dividend at a relatively fast clip, like Edison International and Dominion Resources, also tend to do better than average when rates rise.

The best bets of all? Utility stocks with the highest current payouts that are also growing their dividends, such as PPL and CMS Energy.