Utility stocks have long been the backbone of conservative
portfolios because they're considered safe and pay above-average
Now, utility stocks are looking less attractive, and analysts
say retirees and other risk-averse investors should consider
searching elsewhere for yields that could rival the 4.5-percent to
6-percent rates offered by utilities.
"If interest rates move up sharply, that's a real threat to
utility stock prices," said Leonard Hyman, analyst at Merrill Lynch
Utility shareholders also are being hurt by regulatory curbs on
rate increases, lackluster earnings and slow dividend growth,
stiffer competition, and stock prices already at record levels.
Other dangers also lurk, such as the merger mania sweeping
through the telephone and cable television industry, analysts said.
Phone companies may become stingier with payouts if they decide to
divert money from dividends to acquisitions and new technology.
As a result, the time may be ripe to pocket your gains in
utilities, said Michael Shroeder, who manages about $62 million for
First International Asset Management. "Many of our clients are
retirees who had fairly large holdings in utility stocks over the
years and done well with them," Shroeder said. "The combination of
rising interest rates and deteriorating industry fundamentals led
us to believe that now's the time for them to reconsider whether
they want a large exposure to utilities."
Shares of electric and phone utilities have retreated in the
past two months from record highs amid signs that the economic
recovery is gathering momentum, raising concern about inflation.
Inflation erodes the value of fixed-income investments. Because the
dividend provides the bulk of a utility stock's return, utilities
are viewed as a proxy for bonds.
The Dow Jones utilities average is down about 12 percent from
its all-time closing high of 256.46 set Sept. 13, one month before
the yield on the 30-year Treasury bond dropped to a record low 5.77
percent on Oct. 15.
A strengthening economy that's accompanied by inflation would
sap demand for high-yielding, slow-growth stocks like utilities.
"The problem with utilities is you get the yield, but the prospects
for growth are just not there," said Jim Lovelace, one of the
managers of the $2.6-billion Capital Income Builder Fund. "We find
better opportunities with non-U.S. utilities."
Searching For Yields
If steady yield is what you want, other stocks such as oil
companies and beaten-down growth stocks like Philip Morris Cos.
offer competitive payouts with better growth prospects, money
The Standard & Poor's international oil index of six companies
sports a yield of 4.46 percent, for example, and oil companies have
a better history of raising dividends than do utilities. Chevron
Corp., which yields 3.89 percent, probably will raise its dividend,
said Robert von Pentz, chief investment officer of the $2. …