Most market pundits expect the Federal
Reserve to raise interest rates in December. As usual, that news
triggered fears that the rate hike would set off a drop in utility
and other dividend payers share prices.
Consequently, utility share prices have dropped around 10% since
their early-July peak. But in my view, that knee-jerk reaction has
created a buying opportunity.
Utilities Prosper When Rates Rise
Research that I
detailed the last time interest rate paranoia struck, a year or
so ago, found that utility dividends and share prices typically
increase when interest rates rise. Why?
The Fed raises interest rates only when it sees signs that the
economy is growing. The Fed would not raise rates in a flat or
shrinking economy. Like many other industries, utilities prosper in
a strengthening economy because their customers are buying more
natural gas and electricity. Moreover, even if this time is
different, the Fed would probably only raise rates by a
quarter-percent, which is hardly worth talking about.
If you agree, you should consider adding utilities to your
How to Find the Best Utilities
Here’s how to use the FINVIZ (www.finviz.com)
stock screener (program that scans the market for stocks meeting
your specifications) to find worthwhile candidates.
Start by selecting Screener on the Finviz home page, and then, on
the Filters bar, click “All” to see the available screening filters.
For each filter that you use, click on the associated dropdown menu
to select a search value.
Use the filters in the top row to
select the Utilities Sector and USA (Country), which limits your
list to U.S.-based utilities.
Next, use the Dividend Yield menu to specify a
3% minimum dividend yield. Then, limit
your list to most profitable utilities by specifying “Over
5%” for Net Profit Margin.
Institutional investors, such as mutual funds, have people
that spend their days analyzing financial statements. So work
smarter, not harder, by piggybacking on their efforts. Specify “over
70%” for institutional ownership, which will limit your list to the
utilities most favored by the big players. Cut your minimum to 60%
if you want to see more utilities.
Market analysts publish buy/sell ratings on stocks that they
cover. Finviz organizes those ratings into strong buy, buy, hold,
sell, and strong sell categories. Since analysts are usually
overoptimistic to begin with, avoid stocks that they don’t like by
specifying, “buy or better” on the Analyst Recommendation menu.
My screen turned up four utilities. Here's a
link you can use to find out which utilities the screen is
turning up today.
Allete (ALE) serves electricity customers in Minnesota and
North Dakota. Its dividend yield is 3.7%.
Eversource Energy (ES), serving Connecticut, Massachusetts,
and New Hampshire, is an energy distributor, meaning that it sells
energy generated by other firms. Dividend yield: 4.4%.
PPL Energy (PPL), one of the largest utilities, serves 10
million customers in the U.S. and in the U.K. Dividend yield: 4.7%.
WEC Energy Group (WEC) serves Wisconsin, Illinois, Michigan,
and Minnesota. Dividend yield 3.5%.
As always, consider these utilities to be research candidates, not a
buy list. The more you know about your stocks, the better your