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Boring Utility Stocks Could Easily Double from Here

By Dr. Steve Sjuggerud
Monday, November 21, 2011

Normally, I don't get excited over utility stocks...
 
I rarely ever buy them. I think of them as "boring" income stocks. And I am not an income investor. I am a "total return" investor... looking to maximize my return (whether it's from dividends or capital gains) with minimal risk.
 
But our True Wealth Systems computers have discovered something new. And it should be good for triple-digit gains. By one measure, this opportunity is the best it's ever been.
 
So I am not interested in utility stocks... except at a moment like right now. Let me explain...
 
You can't ignore utility stocks when two specific things happen... These two things don't often happen at the same time. But when they do, it's typically good for triple-digit gains.
 
The first thing that needs to happen is an uptrend in utility stocks.
 
It's a standard True Wealth test. We don't want to try to catch a falling knife. We want to avoid the danger and wait for the freefall to end.
 
When the stock market tanked in July and early August, utilities fell right along with it. But then a remarkable thing happened... Utilities started to dramatically outperform the market. While the overall stock market is flat for the year, shares of utility companies are hitting new highs.
 
The second thing that needs to happen is this:
 
The dividend yield on shares of utility companies needs to rise far above the yield on U.S. government bonds.
 
This rarely happens...
 
It happened in 1956. It happened in late 1974. It happened in 2003. And it's happening right now. Take a look... 
 
Utilities Yields Double the 10-Year Treasury Yield
 
The current dividend yield on utilities is around 4%. Government bonds are paying around 2%. So the percentage "spread" between the two yields is huge. The dividend yield on utilities is around 100% higher than the yield on Treasurys – a record, by far.
 
In the past, when the spreads have gotten even close to this large, it's led to triple-digit gains in utility stocks over roughly three years.
 
"Steve, you must be kidding..." you're undoubtedly saying right now. "They're boring utility stocks. Can they really double from here?"
 
Absolutely.
 
All things equal, utility stocks would have to double from here to make the dividend yield equal the government bond yield.
 
And historically, the dividends on utility companies have been less than the government bond yield. Nearly one percentage point less! So it wouldn't be a stretch for utility companies to soar even more than 100%...
 
That would simply put them back in line with historical norms, based on their dividends.
 
The easiest way to go long utilities is the SPDR Select Utilities Fund (NYSE: XLU). It has the potential to deliver triple-digit returns over the next three years. It has a tiny expense ratio of just 0.2% a year. It's not as volatile as the overall stock market. And the dividend yield is about 4%.
 
We have everything we want in this trade... We have great value here (with the high dividend yield). It's the best value of our investment lifetimes. And we've got the uptrend.
 
It's time to buy.
 
Good investing,
 
Steve




Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
Intel (INTC)... Buffett buys one of our favorite "Dominators"
Reynolds American (RAI)... cigarettes
Digital Realty Trust (DLR)... digital storage REIT
American Campus Communities (ACC)... student housing REIT
Extra Space Storage (EXR)... self-storage REIT
Taubman Centers (TCO)... retail REIT
Kansas City Southern (KSU)... railroad
American Tower (AMT)... cell towers
Domino's Pizza (DPZ)... pizza
Randgold Resources (GOLD)... gold stock

NEW LOWS OF NOTE LAST WEEK
 
Skechers USA (SKX)... shoes
Bank of Ireland (IRE)... a frequent guest of the new lows list
Veolia Environnement (VE)... French water utility
Texas Industries (TXI)... construction materials
China Ming Yang Wind Power (MY)... A China wind stock crashes? Who would have guessed it?
Ener1 (HEV)... electric cars
TheStreet (TST)... financial publishing
Strayer Education (STRA)... secondary education
Avon Products (AVP)... makeup

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