Low Interest Rates Bring Appeal to Utility Stocks
In March, the head of the Federal Reserve, Janet Yellen, announced a less aggressive plan regarding interest rates for the rest of 2016. Back in 2015, the same Federal Reserve Committee was leaning towards more growth and stability when talking about the U.S. economy. They believed the economy had gained some legs after being punished since 2008. On December 16, 2015, Yellen and the Fed were confident enough to raise the Federal Funds Rate one quarter of a percentage point. Since then, the market has been less than steady. With oil prices plummeting and stock values erratic, the U.S. as well as the global economy has had a turbulent first quarter in 2016. Foreign governments have held their respective rates at zero and even negative believing this will help turn the tide. Yellen stated, “Recent indicators of capital spending and business sentiment have been lackluster…foreign growth now seems likely to be weaker this year than previously expected, and earnings expectations have declined.” To sum her comments up in numbers, projections for the federal funds rate is 0.9 percent for the end of 2016 and 1.9 percent for the latter part of 2017. These forecasts are both half of a percentage point below the December numbers. Yellen led off her March 29 speech “…the Committee anticipates that only gradual increases in the federal funds rate are likely to be warranted in coming years.”
So, what to do when the Fed backs off their projections of raising interest rates? Investing in the utilities sector is a good place to start. This is no secret in the finance world. In his Q & A with Douglas Simmons, a utilities focused fund manager with Fidelity Investments, Associated Press writer Alex Veiga states, “The [utilities] sector has traditionally been seen as a more attractive investment at times of heightened market volatility. And their steady returns and high dividends also make utilities an appealing bet, especially when interest rates are low.”
Utility stocks have become more and more appealing in recent years for a number of reasons. Rising share prices and steady distributions never hurt. The infrastructure in the utilities sector is decades old and in need of updating. This can be seen as potential growth. Even though the global economy is struggling and unstable, most utility stocks are unaffected because they only deal in U.S. currency. Another tip is to look to the south when considering investing in utilities. The population in the U.S. seems to be migrating in this direction over time, creating a steady stream of inevitable customers. Certain states such as Texas, Florida, and the Carolinas have utility companies that are the largest and most capable in the country. If a warmer than expected winter hits the United States, as it did in 2015-2016, utility companies across the south don’t have to wear it on the chin like their counterparts to the north.
With this is mind, not all utility stocks are created equal. Even if interest rates rise, which does not seem to be soon, look for based utility companies that can handle the volatility of the market. Conservative investors seem to migrate away from utilities and toward bonds when interest rates go up. Do your homework and look for well diversified utilities companies. Potential growth and steady returns are synonymous with companies who have a strong balance sheet and their hand in multiple sources of energy, i.e. electric, natural gas, and renewables. With the Fed letting it be known that interest rates will stay low, now is a good time to add utilities to your portfolio.
References: