Utility Stocks Won’t Be This Cheap for Long—and Their Dividends Still Shine

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Utilities have been staggered by rising bond yields and interest rates. Now we’re closer to the end of that regime than the beginning.

Utility stocks, a popular haven for dividend investors, have lost some power this year as investors pile into technology names and other growthier parts of the market.

Nevertheless, there could be a silver lining for utility shares. Income-seeking investors looking for stable and growing dividends have a chance to at least nibble at stocks in an attractively valued sector. The relative valuation of utilities versus the S&P 500 is at “near historic lows,” says Teresa Ho Kim, an equity research analyst at J.P. Morgan Asset Management.

Until the Federal Reserve began to raise short-term rates early last year, utility stocks had the upper hand over many bonds for a long time. One of her holdings is American Electric Power . The company, based in Columbus, Ohio, has a sizable geographic footprint that stretches over 11 states, including Michigan, Texas, Virginia, and Tennessee. It serves about 5.6 million U.S. customers with about 40,000 miles of transmission lines.The company has faced some setbacks such as announcing earlier this year that it had terminated an agreement to sell its Kentucky subsidiary.

Link says she is keeping close tabs on the company’s spending, including its capex. “They can get more efficient at what they are doing,” she says. “It really is a [return on equity] story. They have to improve that.”

 

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