Utilities for Unfixed Income
Monday, September 28, 2020
Utilities offer attractive "unfixed" income—high dividend yields, with prospects for growth.
The spread between the utility sector dividend yield versus 10-year Treasury yield remains in the 99th percentile relative to the past 25 years. Why do we view today’s environment as a unique valuation opportunity in utilities? 
With renewed volatility in the markets, it may be a good time to think about an allocation to utilities.
What may come as a surprise to investors is that the traditionally-defensive utilities sector has significantly lagged S&P 500 Index year-to-date*. Utilities have underperformed by over -11% as a handful of mega-cap stocks have driven the broad market higher.
As of August 31, 2020
Source: Bloomberg; S&P; Miller/Howard Research & Analysis
We view today’s environment as a unique valuation opportunity in utilities.
The dividend yield for utilities stocks relative to the US 10-year Treasury yield peaked on March 23, 2020 during the COVID-19 market panic. The spread remains near historic highs, even six months later. Today’s spread between the utility sector dividend yield versus 10-year Treasury yield remains in the 99th percentile relative to the past 25 years.
As of August 31, 2020
Source: Federal Reserve Bank of St. Louis
This is largely driven by one half of the equation: the 10-year Treasury is near historic lows. To frame it from an income-perspective, a client with $1 million in savings invested in the 10-year Treasury can expect an annual income of roughly $7,000.** Looking at the Miller/Howard Utilities Plus portfolio, with a current dividend yield of 3.6%, that same $1 million could hypothetically produce an annual income of $36,000 in year one.***
Utilities are, traditionally, a more stable source of income for bond investors who are tired of meager income. With a high current yield—5-times the 10-year Treasury yield—and a strong track record of income growth, utilities can be a powerful alternative to fixed income.***
Sources: Bloomberg, S&P 500 Utilities Index, S&P 500 Index, Federal Reserve Bank of St. Louis, Miller/Howard Research & Analysis
* As of September 21, 2020
** Source: Federal Reserve Bank of St. Louis Economic Research - 10-Year Treasury Constant Maturity Rate (DGS10), as of August 31, 2020
*** Based on the Miller/Howard Utilities Plus portfolio dividend yield as of August 31, 2020
Bryan J. Spratt, CFA, focuses on utilities, telecommunications, and energy stocks. Before joining Miller/Howard in 2004, Bryan worked as an analyst and portfolio manager in investment subsidiaries of Comerica Bank and Munder Capital Management, where he was a member of the energy and power team. Prior to that, Bryan was at Banc One Investment Advisors and the One Group Funds where he was responsible for utilities and telecom for the value team. He graduated summa cum laude from Spring Arbor College with a BA in Economics/Computer Science.
Adam Fackler, CFA, focuses on utilities, telecommunications, and midstream energy including master limited partnerships (MLPs). Prior to joining Miller/Howard in 2016, Adam spent 10 years at Rodman & Redshaw and KLR Group, focusing on MLPs, and at MLV & Co., covering exploration & production companies and MLPs. Adam holds a BS in Business Administration with a minor in Economics from Bucknell University.
