Utilities Replacing CDs and Bonds as the Best Retirement Investments (XLU, IDU, UTG, AEP, FE, PPL, AWK)

24/7 Wall St.

The government bond market pays investors nothing now.  The 5-Year Treasury Note, a staple for retail investors historically, pays a dismal 0.86%.  The appeal of this duration would also appeal to bank certificates of deposit (CD) investors.  A visit at Bankrate.com shows that the national average CD rate for a 5-year maturity is now only 1.26%.

While many investors are opting for safety at any cost, there is an army of retirees and near-retirees which are depending upon income from their life savings in order to live and these investors are being forced to look elsewhere in predictable dividend stocks and other instruments that they feel are low in risk.  Utility stocks have accidentally become the new CDs and bonds for investors due to their safety, suitability, and high dividends.

Generally speaking, utilities have fairly predictable earnings and they pay out a substantial portion of their income as dividends.  Some utilities now pay dividends that yield more than 4% to investors.  The power companies often have local competition in their local markets now due to deregulation and the ongoing regulatory pressure of carbon emissions is actually keeping a lid on some of the upside that might otherwise be there.  The trick is for investors to find the utilities where the dividend is safe even if these companies are forced to spend the collective billions due to new environmental areas.

Utilities have not been immune to the market pressure this week, but the reality is that the sector was within about 2% or 3% of the yearly highs as recently as last Friday.  A 5% sell-off in the last two days may be an opportunity for those investors with long-term outlooks.  The utility sector appeals to many investors looking for income, value, predictable growth, and they also classify as defensive stocks.  Investors used to look for the highest yielding CDs from insured banks and savings & loans, but now that opportunity is only found in utilities.

We have compiled a list of the key liquid exchange-traded funds and a closed-end funds for investors who want diversification.  We have also screened out 3 of the top electric utility stocks for retail investors which offer the following minimum criteria: $5 billion in market value, a 4% or higher yield, not trading at a 52-week high but also not down more than 10% from the highs (avoiding the troubled players), and which also have 10% or more upside to the consensus analyst price targets from Thomson Reuters.  Lastly, we have our top water utility in America that is slightly outside of the normal utility parameters for the power generation and electric utility companies.

In ETFs and Funds, we have highlighted the Utilities Select Sector SPDR (NYSE: XLU), iShares Dow Jones US Utilities (NYSE: IDU), and the Reaves Utility Income Fund (AMEX: UTG).  In utility and generation companies we have identified American Electric Power Company (NYSE: AEP), FirstEnergy Corporation (NYSE: FE), and PP&L Corporation (NYSE: PPL).  In the water utility sector, we have discussed American Water Works Company, Inc. (NNYSE: AWK).  What matters most here is the current situation and opportunity on each.  As we always stress: understand what you are investing in!

What do you think?

Click the button below to comment on this article.