With the S&P 500 finally in positive territory year-to-date, we took a look at what’s been working in 2016. Topping the list is the Utility sector, which has been the go-to sector for income investors, and even non-income investors in this volatile market.
Healthcare, formerly the leading sector for quite a while, has fallen out of favor, thanks to political headline risk due to prescription overpricing by some firms. meanwhile, the Utility sector is up over 12% in 2016, leading all others by a wide margin. Even the resurgent Energy sector, which is up 12% over the past month, trails Utilities by a wide margin:
With all of the strong price performance in the Utility sector, we wondered if there were any dividend stocks left that weren’t already above their consensus analyst price targets. We came up with these 5 stocks, which range in size from small caps Otter Tail and Empire District, to large cap Dominion Resources:
Granted, these stocks aren’t far from their average target prices, but compare where they’re at to the overall Utility sector, which is nearly 6% above its average price target. All of them have outperformed the S&P 500 year to date:
Dividends: Our High Dividend Stocks By Sectors Tables now tracks these 5 stocks and their current yields, in the Utilities section. NASDAQ:OTTR has the highest dividend yield, at 4.36%, with one of the lower dividend payout ratios in the group. All but NYSE:EDE have higher than average dividend payouts. However, they do have a higher than average dividend payout ratio.
Options: Want some “sauce on the side” with your dividends? NYSE:AES appears to have the most attractive covered call option yields. The AES May $12.00 call strike pays a bid price of $.30. Couple that with the $.11/share dividend which goes ex-dividend around 4/29/16, and you get a 3.53% yield in around 2 months, or 21.11% annualized.
The $12.00 call strike, being $.38 above AES’s $11.62 price/share, leaves you some room for potential price gains.
With the price gains these stocks have had, you might also want to consider selling cash secured puts below their price/share, in order to get a lower breakeven.
Valuations: As usual in a group of stocks, it’s a mixed bag for valuations. OTTR sports the lowest Price/Book, whereas AES has the lowest Price/Sales and Forward P/E valuations.
Financials: OTTR also has the lowest Debt/Equity ratio, and most of its other metrics are better than industry averages.
When it comes down to it, hiding out in a defensive sector may not be such a bad idea in 2016, which has the uncertainty of the US Presidential election, and the possibility of more Fed rate hikes, both of which could serve to continue rattling the market in the future. For now, the 5-week rally, inspired by crude oil’s comeback, (at least until the upcoming April 17th OPEC meeting), and the additional ECB stimulus, may possibly give you a pullback to take advantage of in some Utility stocks, as investors take on more risk.
Disclaimer: This article is written for informational purposes only. Please perform your due diligence before investing in any of the stocks mentioned in this article.
Disclosure: Author owned no shares of any stocks mentioned in this article at time of publication.