Utilities Hitting 52-Week Highs: What You Need to Know

NEW YORK ( TheStreet) -- They may seem stodgy and boring, but utility stocks have been as hot as a nuclear reactor on overload.

In fact, on Thursday the Utilities Select Sector SPDR ETF ( XLU) hit a 52-week high of $37.20. The one-year chart above illustrates what a ride this ETF has had, with its yield-to-price now well below 4%.

You can see that the utility sector can get ahead of itself during times of high anxiety and market uncertainty. With all the scary news out of Europe the past three months and Treasury bond yields hitting all-time lows, income investors have been acting desperate for stability and yield.

Thursday the 30-year U.S. Treasury bond hit a never-before-seen low yield of 2.72%. Can you imagine anyone tying up their money for 30 years at a rate that's less than the true inflation rate?

Yet that's exactly what's happening. The bi-polar nature of the stock market these past few months and the rather dismal economic reports about the U.S. economy have combined to motivate yield-hungry investors in the direction of what seems both safe and conservative.

Warning Signs: The Time to Beware Is Now

As we can plainly see from the chart above, the "safe and conservative" mystique of utilities can meld into dramatic disappointment, as was experienced by XLU investors in the summer of 2011.

Are we heading for yet another unexpected swan dive for the utility sector? One clue would be to compare how the XLU performs in comparison with a broader market index like the S&P 500.

Below is a comparison chart of the XLU vs. the SPDR S&P 500 ETF ( SPY).

In fact, since the end of 2011, utilities have not exactly moved in lock-step with the rest of the stock market. When the SPY peaked in late March and early April 2012, the XLU had somewhat of a correction.

Since then, the SPY has been in correction mode and the XLU has climbed higher and higher. At some point (perhaps in time for a summer stock rally), SPY will rally and history appears to confirm that the utility sector will cool its heals during that rally.

Of course, if you're holding the shares of some successful individual utility companies like Integrys Energy Group ( TEG), which also hit a 52-week high on Thursday, you may be less nervous about a sector correction.

Why? Because you're getting paid almost 5%, and if TEG corrects down to its May 7, 2012 intraday low of $53, you can add to your position with a yield-to-cost that would then exceed 5%.

Integrys' portfolio of regional utility and power companies is amazing. Integrys provides natural gas service and electricity to approximately 1,682,000 residential, commercial and industrial, transportation, and other customers in Chicago and the northern suburbs of Chicago, as well as other parts of the upper Midwest. It prides itself in paying a generous dividend to its shareholders, so it's no wonder that it is a big supporter of extending the favorable tax treatment for dividends.

Integrys sponsored a "Defend My Dividend" program, and is adamant about encouraging its shareholders to contact members of Congress to let them know that the double taxation of dividends is unfair and that they should support the current 15% tax rate.

Although utilities generate a steady stream of dividends, at current price levels, there may not be much upside growth for the price of their shares.

That's why income investors are turning to alternatives to utilities and some energy companies whose shares are below their 52-week highs and have both upside potential and a good yield.

Jim Cramer interviewed the CEO of Spectra Energy ( SE) on his "Mad Money" show last night. The company pays a 4% dividend at current price levels. It's also well below the 52-week high of $32.27 set in March of this year.

SE's shareholder-friendly Web site makes it clear why its natural gas business is so promising and is enhanced by its natural gas pipeline and storage businesses.

The company's CEO emphasized Spectra's involvement in a $1.2 billion project to bring more natural gas to northern New Jersey and New York City. He also pledged to keep raising the dividend payout as much as possible in the years ahead.

A "quasi-utility" company that also pays a handsome dividend is energy giant ConocoPhillips ( COP). With its shares selling at or near $54, and a $2.64 annual dividend, investors can enjoy nearly a 4.9% dividend yield.

COP completed the spinoff of its downstream businesses to its stockholders last month in the form of shares of Phillips 66 ( PSX). With the completion of this transaction, ConocoPhillips is now the world's largest independent exploration and production company, based on proved reserves and production of liquids and natural gas.

The 12-month average price target set by analysts for COP is almost $65. That's 18% higher than its current price, and if this comes to pass and you add in the almost 5% dividend yield, it may be reasonable to anticipate a total-return of around 23%.

For diversification's sake, and if you like the idea of buying low while still earning a generous dividend, consider a resource-based royalty trust like Cross Timbers ( CRT).

With its current 7% yield (paid monthly) and trading close to the bottom of its 52-week range, CRT is worth looking at, especially when you consider that it has no debt and boasts a trailing-12-month Return on Assets of 74% and a magnificent 131% Return on Equity.

Cross Timbers Royalty Trust operates as an express trust in the United States. The company holds 90% net profits interests in various royalty and overriding royalty interest properties in Texas, Oklahoma and New Mexico.

It also holds 11.11% nonparticipating royalty interests in nonproducing properties located primarily in Texas and Oklahoma; and 75% net profits working interests in seven oil-producing properties, including four properties in Texas and three properties in Oklahoma. CRT was founded in 1991 and is based in Dallas, TX.

At the time publication, Courtenay was long COP.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time publication, Courtenay was long COP.

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