April 21, 2016
The Top 5 Utility Stocks for 2016
Many investors consider utilities stocks to be substitutes for bonds. Utility companies typically enjoy very stable cash flows and pay out most of their earnings in the form of dividends. This results in above-average dividend yields that attract income-seeking investors.
Going into 2016, most utilities companies will face headwinds, since the U.S. Federal Reserve raised the federal funds rate by 0.25% in December 2015, the first such change in over a decade. In a rising interest rate environment, utility stocks tend to underperform the broad U.S. equity market. Most utilities companies rely heavily on debt to fund their capital expenditures and operations, and rising costs of debt can lower earnings. Most investors buy utilities stocks for dividend reasons, so the rising interest rates for other securities, mainly government bonds, create a lot of opportunity costs for holding utilities stocks.
Income-seeking investors who have a long-term view on the utilities sector have many good-quality options for investments.