Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

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

© 2005-2019 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

6 Critical Money Making Rules