Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Trend Forecast 2024 - 15th June 24
Gold Price Consolidating at High - 15th June 24
NVIDIA Stock Market: Price Prediction for the Future - 15th June 24
When Will the Boom/ Bust Rollercoaster End? - 15th June 24
Stock Market Trouble Lies Ahead. Are You Ready For It? - 15th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24
Bitcoin Trend Forecast, Crypto's Exit Strategy - 31st May 24
Zimbabwe Officials Already Looking to Inflate New Gold-Backed Currency - 31st May 24
India Silver Imports Have Already Topped 2023 Total - 31st May 24
Gold Has Done Its Job – Isn’t That Enough? - 31st May 24
Gold Stocks Catching Up - 31st May 24
Time to take the RED Pill - 28th May 24
US Economy Slowing Slipping into Recession, But Not There Yet - 28th May 24
Gold vs. Silver – Very Important Medium-term Signal - 28th May 24
Is Gold Price Heading to $2,275 - 2,280? - 28th May 24
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Utilities Stocks Beat Treasury Bonds

Stock-Markets / US Utilities Apr 25, 2008 - 02:04 AM GMT

By: Money_and_Markets

Stock-Markets

Best Financial Markets Analysis ArticleNilus Mattive writes:I recently read an article on Forbes' website that attempted to help income investors compare the merits of utility stocks and U.S. Treasury bonds.

On the bad news side, the column noted that the yields on both utility shares and 10-year Treasuries are down about 50% since the beginning of 1995. Ouch!


Even more hurtful to my dividend-loving heart was this assertion:

"But with a few short-lived exceptions, the 10-year Treasury bond has delivered higher yields than the average utility stock. Since 1995, the T-bond has averaged a 5.2% yield, while the average utility has yielded 4.2."

But wait, obviously there are "short-lived exceptions," right? That means savvy investors do have opportunities to lock-in above-average yields?

Yes and yes. In fact, right now is one of those rare gifts. As the Forbes article pointed out, this is the first time since 2003 that the average utility stock (as measured by the S&P 1500 Utility index) has yielded more than 10-year Treasuries.

What the article didn't point out is that ...

There Is Another, Even More Compelling Reason to Choose Utilities over Treasuries:
There's No Ceiling on Your Effective Yield!

Let's say your friend buys a 10-year Treasury today. He is now virtually guaranteed an annual yield of 3.7%.

Never mind that you can easily find utilities with much higher yields right now.To keep our example simple, let's just say you opt to buy a utility that yields the very same 3.7%.

In other words, you buy a $10 stock that pays an annual dividend of $0.37.

Your friend is quick to point out that there's no guarantee on that yield ... and he's right. However, you picked a company that has been paying a dividend consistently for decades, even increasing it by roughly 10% every year.

Now pretend that ten years have gone by:

Your friend's 10-year Treasury just handed him his last payment, which was good for an annual yield of ... you guessed it, 3.7%! Oh, and unfortunately he now has to figure out where to reinvest his principal. I sure hope rates are good in 2018!

Meanwhile, your utility just gave you an annual yield of 9.6% based on your initial purchase price!

How can that be?

Well, you bought the stock at $10 and its annual dividend was $0.37 a share.

The Effect of a 10% Annual Dividend Increase ...
Your Annual Dividend
Start
$0.37
Year 1
$0.41
Year 2
$0.45
Year 3
$0.49
Year 4
$0.54
Year 5
$0.60
Year 6
$0.66
Year 7
$0.72
Year 8
$0.79
Year 9
$0.87
Year 10
$0.96

But every year since, the dividend payment increased 10%. Check out my table to see how the dividend rose each year!

End result: Ten years later, you're receiving an annual payment of $0.96 a share. Divide that $0.96 a share by your original purchase price of $10 and ... a whopping effective yield of 9.6%!

Even better, you're likely to get another pay raise every year going forward, no matter what prevailing interest rates look like! And as long as the company keeps boosting its dividend, and you keep holding the shares, there's no limit to how high your effective yield can go.

It's crucial that income investors understand this concept, known as "yield on cost." After all, it highlights the hidden value of buying and holding stocks with consistently rising dividends. And it is another way of looking at the yields currently available to you.

One other thing ...

You'd Probably Be Sitting On Some Capital Appreciation, Too!

Utilities Post Strong Capital Gains!Look, I don't think income investors get much benefit from trying to trade dividend-paying stocks. Instead, I think they're best served by buying and holding companies that consistently raise their payments.

But I do want to point out that it's very reasonable to expect dividend stocks to increase in value over time, too. By their nature, these are profitable companies that are growing at fairly predictable rates. So, naturally, investors will bid the share prices up over time.

Sometimes the gains can be especially good, too! Heck, utilities are a great example.

In the last four years, they have been posting very strong capital appreciation. Take a look at my chart. As you can see, the Standard & Poor's utility index has risen solidly in each of the last four years.

So far in 2008, utilities have been taking a bit of a breather. But given the fact that these companies tend to see steady demand during rough economic patches, and given their relatively big, stable yields, I continue to think they're a smart addition to long-term income portfolios. Any long-term capital gains are just icing on the cake.

Best wishes,

Nilus

P.S. I'm currently recommending three U.S.-based utilities, and one Chinese power company, in my Dividend Superstars newsletter. If you want to learn all about those firms, as well as my other favorite income-producing investments, subscribe now . The cost is just $39 a year, and if you sign up today I'll rush you a series of valuable bonus reports, too! Click here for all the details.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in