Dow Jones Utility Index Catches A Second (Bullish) Wind

By Jim Donnelly, Olson Global Markets

After having been one of the star performing sectors of 2011, utilities stocks have lagged badly behind this year (2012), posting a miserly 3.1% gain year-to-date. That said, the current weekly chart of the Dow Jones Utility Index (DJU) reveals that it has recently rebounded off of key trend line support at 466.37 and appears to be in position to make a new “leg” higher. If it does, it could begin a renewed move toward the 525 area, which happens to the “target” of a bullish “reverse head & shoulders” pattern that developed between 2008 and 2010.

Although there is an argument to be made that utility dividend yields are not as juicy as they were a couple of years ago, they still look attractive given Fed Chairman Ben Bernanke’s plan to keep short-term interest rates near zero through at least mid-2015. Moreover, yields on telecom giants ATT (symbol: T) and Verizon (symbol: VZ) have declined by roughly 40bps since May to 5.00% and 4.60% respectively with yields on many utility companies holding steady or even moving up a little during the same period. That, of course, was due to a rise in telecom stock prices and a dip in utility stock prices.

Nevertheless, the Dow Jones Utility Index appears to be ready to make up for some lost ground. High yielders within the Dow Jones Utility Index now include: Exelon (EXC at 5.70%), First Energy (FE at 4.80%), Duke Power (DUK at 4.70%), PG&E Corp. (PCG at 4.30%), American Electric Power (AEM at 4.20%) and Southern Company (SO also at 4.20%).

Utility names that are not part of the Dow Jones Utility Index include: Pepco Holdings (POM at 5.70%), PPL Corp. (PPL at 4.80%) and Unitil Corp. (UTL at 5.10%).

The Federal Reserve’s plan to extend its zero percent policy through mid-2015, to extend operation twist until the end of the year, and to buy $40 billion of mortgage backed securities for an indefinite period of time should keep a floor under utility prices for some time to come. In turn, that should entice “yield seekers” to consider buying utility stocks for a period of time as well.

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