Yield hunters may be writing off utility stocks ahead of the Federal Reserve tapering. But worth a look are utilities in a position to raise dividends. Here's one, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
Today let's talk dividends. Specifically, dividend-paying utility stocks.
How do you tell if a stock in this beaten-down sector yields enough to make it a buy in the current, risky market?
The looming possibility that the Federal Reserve will start to taper off its $85 billion in monthly purchases of Treasurys and mortgage-backed securities has sent global financial markets into a tizzy of guessing.
Suddenly, income investors who have been longing for anything paying more than 2% are confronted with 10-year Treasurys paying 2.8% and dividend stocks with yields of 4%, 5%, or more.
The problem, though, is figuring out whether those yields are worth the risk.
Prices of bonds and dividend-paying stocks have plunged. They could keep falling. What look like fat dividend yields might not be adequate compensation for the risk of losses to capital.
And maybe yields tomorrow will be even higher.
Frankly, we're all guessing here. What I'm sure of is that all this guessing will produce overreaction and mispricing. And that I'd like to be ready to pounce when the inevitable overreaction produces attractive mispricing.
But I've also started to see scattered examples of dividend-paying stocks, even in the battered utility sector, where current yields look like an adequate return for likely risks to capital.
I argued recently that you want to make sure you have cash on the sidelines ready to put to work if September and October produce some bargains. Today I'll point you to specific stocks in parts of the market where I think current yields are a good value.
I'll be laying out what you should be searching for in utility stocks if you're trying to find a high yield. Next week, my focus will be MLPs (master limited partnerships) and REITs (real estate investment trusts.)
But, first, let me explain why guessing is likely to produce bargains in the financial markets. I'd break guessing down into two parts.
First, there's the guessing of what's it worth in asset classes clearly connected to the Federal Reserve's program of asset purchases. And second is the guess as to what's connected. If the Fed does start to taper off its purchases, how will that affect seemingly unrelated assets, such as Brazilian stocks.
Today and next week I'll focus on the first kind of guessing. It makes sense that if the Fed scales back its purchases of Treasurys and mortgage-backed paper, yields on these assets will climb. And with Treasurys serving as the benchmark for so much of the income sector, it makes sense that yields will rise across much of the financial market, and prices of these assets will fall.
The guessing here, involves estimating the effects of a Federal Reserve taper that is, so far, unspecified in its schedule and dimension.
The 10-year US Treasury closed at a yield of 2.85% on August 16. A month ago the yield was 2.53%. A year ago it stood at just 1.81%.