This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Don't Pull the Plug on Utilities

With interest rates rising again lately, it's time to check the meter on utility funds.

Once the humdrum investing province of widows and orphans, utilities surged in popularity last year as their generous dividends -- now taxed at only 15%, per the president's 2003 tax cut -- gave investors of all stripes a welcome alternative to low-yielding Treasuries.

Utility companies, which are traditionally big corporate borrowers, also benefited from historically low long-term rates in 2004, surprising a number of fund managers who had expected higher rates to keep a lid on utility share prices. As a result, the average utility fund rose a nifty 21.6% for 2004, trailing only energy funds, according to fund tracker Morningstar.

"A lot of people expected last year to be weaker on account of rising Treasury yields, but that turned out not to be the case at all," says Morningstar utility fund analyst David Kathman.

Utilities' strong run is all the more astonishing since it comes in the face of the Federal Reserve's best efforts to stem inflation by raising rates. Fed Chairman Alan Greenspan has lifted the overnight lending rate six times since last June, and most market analysts predict he and his merry band aren't done yet. In his most recent testimony to Congress, Greenspan admitted he was stumped by the stability in long-term rates, calling their failure to rise a "conundrum."

The Maestro may be lacking an explanation, but utility fund shareholders are seeing firsthand how devastating rising rates can be on their investment.

When a higher than expected core producer price index was announced last week, the fear of inflation caused the yield on the benchmark 10-year Treasury bond to jump 8 basis points to 4.26%. The rise in yields promptly led to heavy selling in utility shares, as evidenced by a 1.1% drop in the iShares Dow Jones U.S. Utilities Sector (IDU) exchange-traded fund, which tracks the sector.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
EXE $1.51 0.00%
EIX $61.70 1.10%
ETR $79.10 1.20%
PCG $52.44 1.10%
AAPL $132.92 0.20%

Markets

DOW 18,096.52 +58.55 0.32%
S&P 500 2,112.25 +3.33 0.16%
NASDAQ 5,064.5860 +4.34 0.09%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs