Utilities/telecom stocks remain an attractive option for yield-starved investors
Utilities and telecom stocks may be trading at historically high multiples, but their price tags shouldn’t keep investors away from these income diversifiers. The case for an allocation to these and other dividend-paying “essential services” stocks remains as strong as ever. Consider:
- Interest rates are extremely low and will remain low for the next two to three years, given the Fed’s latest round of quantitative easing. As a result, utility/telecom companies are attractive and undervalued on a relative yield basis.
- As my colleague Connie Luecke recently observed, many quality utility/telecom stocks currently offer higher dividend yields than their corporate bond yields. This historical anomaly suggests these stocks are inexpensive relative to their corporate bonds.
- Utility fundamentals are better today than in past years. Higher multiples may be deserved given the favorable regulatory environment, visibility of earnings, lower historical payout ratios, and dividend growth prospects. In other words, investors are getting what they pay for.
- Attractive investment opportunities still exist across the essential services space – it’s about knowing where to look. Given that integrated utilities have not participated in the utility rally, a number of companies offer favorable yields and fundamentals. Within telecom, towers and satellite companies are attractive. Right now, we also view a number of transportation companies as an area with strong relative valuations.