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Morningstar's Bischof: Utility Stocks Still an Appealing Choice

By    |   Wednesday, 10 December 2014 09:10 PM

While utility stocks aren't exactly cheap, they still represent an attractive investment, says Morningstar equity analyst Andrew Bischof.

"The sector's financial health, dividend-growth outlook, and relative yield are as good as they have been in decades," he writes on Morningstar.com.

Of course, investors should realize that utilities may "underperform the market in the near term if interest rates start climbing," Bischof says.

On the negative side, the utility sector "appears overvalued, trading at a 13 percent premium to our fair value estimates, an 18 price-earnings ratio, and a 3.5 percent dividend yield, which is below the sector's long-term average," he writes.

Still, that yield represents a "historically attractive" 133-basis-point premium over the 10-year U.S. Treasury yield, Bischof says.

"Our historical analysis suggests that utilities could still produce 8-10 percent total returns even if Treasury yields rise above 3 percent during the next three years."

Among the stocks he recommends are CenterPoint Energy, Edison International, Wisconsin Energy, American Electric Power, NextEra Energy and Westar Energy.

The S&P 500 Utilities Index has returned 21.5 percent over the past year, easily beating out the 14.7 percent return of the overall S&P 500.

Meanwhile, Kiplinger combed through the Dow Jones Industrial Average to select top dividend plays in October.

The publication based its choices on "a strong track record of dividend increases plus a business outlook healthy enough to support continued dividend generosity and long-term stock price growth."

The companies, listed in descending order of their dividend increases over the past five years, include UnitedHealth Group, Microsoft, Home Depot, Nike, 3M, ExxonMobil and United Technologies.

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While utility stocks aren't exactly cheap, they still represent an attractive investment, says Morningstar equity analyst Andrew Bischof.
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2014-10-10
Wednesday, 10 December 2014 09:10 PM
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