Despite the recent turmoil in the equities markets -- or perhaps because of it -- the utilities sector has been a strong performer recently. These defensive plays are particularly attractive right now because many of them feature dividends that offer a greater yield than some highly rated long-term bonds.
Here's a year-to-date comparison of the Dow Jones Industrial Average and the Dow Jones Utilities Index. The utility index has outperformed the industrial average overall this year, but look at the right side of the chart. Over the past few weeks, the utility index (dark blue) has bounced back with a vengeance, while the industrial average (green) still has a long way to go before scaling its old highs.
While the most major indices continue to trade under their 200-day moving averages, a stock like Southern Company (SO) is trading less than a dollar from its all-time high. Southern Company offers a dividend of about 4.7%, which compares favorably to the 3.67% yield currently available from a 30-year U.S. Treasury bond.
One thing I like about SO is the fact that it enjoyed a high-volume reversal on Aug. 9. On that day, the Southern Company traded more than 21 million shares, the most volume since Dec. 7, 2000. This high-volume reversal has the effect of shaking out the "weak hands" and allows the stock to resume its upward trajectory by removing potential sellers from the mix.
The hammer-like formation that occurred on that day is particularly telling; the long wick informs us that the reversal was vicious. Getting caught in a wicked reversal of this nature is akin to placing one's hand on a hot stove -- the longer the wick on that reversal candle, the hotter the stove. Anyone who was caught short on Aug. 9 will probably be in no hurry to short it again anytime soon.
Perhaps even more impressive is the performance of Consolidated Edison (symbol ED), popularly known in New York City as Con Ed. After selling off with the market earlier this month, ED made a complete recovery, gaining it all back to hit $54.87 last Friday. That's the highest level at which the stock has traded since 1998. ED offers a dividend yield of about 4.4%.
One utility stock that gets a lot of attention is Entergy (ETR), which features an even greater yield than our two previous picks. But despite Entergy's 5.2% dividend, its recent performance simply hasn't been as impressive as that of Southern Company or Consolidated Edison. While those two stocks have bounced nicely, Entergy has lagged its peers.
Why has Entergy failed to rebound as sharply as some other utilities? It's difficult to say; there has been some insider selling at the company, but it doesn't appear to be excessive. There was also some bad publicity recently when the governor of Vermont blamed the company after a fish contaminated with a radioactive isotope was found near one of Entergy's plants. While there is no evidence pointing directly to Entergy at this time, I'm going to take a wait-and-see attitude toward the stock.
With Ben Bernanke and the Fed promising to keep interest rates low until the middle of 2013, these dividend plays could have some serious legs. The most obvious danger lies in a potential QE3 scenario; if Big Ben and company announce further monetary stimulus, it could signal a move back into growth-oriented investments and out of dividend plays like utilities. But even if that turns out to be the case, the high yields offered by these stocks will offer some downside protection.
At least for now, the never-ending search for yield should continue to lead investors to utilities.