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 The S&P 500 utility sector <.SPLRCU>, whose dividend yield at 3.9
percent is more than 100 basis points above the 10-year Treasury
yield <US10YT=RR>, led the S&P 500's advance on Friday after concern
about the launch of U.S. air strikes on Iraq drove the benchmark
bond yield to 14-month lows.
The equity market recovered from early losses, in part due to news
that Russia's Defense Ministry said military exercises near the
Ukraine border had ended. Any global worries that keep a bid in
government debt, meanwhile, will motivate investors to go after
stocks with fat dividend yields.
The utility sector is up 8.8 percent since Dec. 31, the third
best-performing sector for the year, following technology and health
care. Telecom hasn't been as strong - gaining just 0.8 percent in
the same period - but two of that sector's constituents, Windstream
Holdings <WIN.O> and Frontier Communications <FTR.O>, have both
gained roughly 40 percent.
Utilities hit a bout of profit-taking after ending the first half of
the year in the No. 1 spot. The sector had risen 16.4 percent as of
June 30, bolstered in part by the shares' high yields and the appeal
of a safer sector at a time when investors were still a bit worried
about economic growth.
Analysts say the attractiveness of high dividend-paying sectors such
as utilities is not likely to end soon, especially with valuations
still below the benchmark's level. The forward price-to-earnings
ratio for S&P utilities is at 14.9, below the S&P 500's p/e of 15.2,
Thomson Reuters data showed.
"The U.S. 10-year is an attractive yield given the backdrop of very
weak yields around the world. Therefore, that does make the
dividend-paying sectors increasingly attractive. That's been the
footprint for this market," said Quincy Krosby, market strategist at
Prudential Financial, based in Newark, New Jersey.
Overseas turmoil, particularly in Ukraine, has driven up demand for
safe-haven bonds, also supported by the Federal Reserve's continued
purchase of Treasuries while it gradually pares back its bond-buying
program.
The S&P 500 utility sector shot up 2 percent on Friday, its biggest
daily percentage gain since June. Earlier this week, the index
flirted with correction territory as it lost nearly 10 percent from
a high set June 30.
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Also benefiting from the drop in bond yields are exchange-traded
funds tied to dividend payers, including the Powershares Dividend
Achiever exchange-traded fund <PFM.P>, which rose 1.3 percent on
Friday and is up 3.2 percent for the year.
The First Trust Morningstar Dividend Leaders Index Fund <FDL.P> has
performed better, gaining 1.2 percent on Friday and up 6 percent for
the year so far.
The S&P telecommunications index <.SPLRCL> has an even higher
dividend yield than utilities, at 4.7 percent, though a smaller pool
of stocks. The sector has been weak this year because of a
lackluster performance by its biggest names, AT&T <T.N> and Verizon
<VZ.N>.
However, network communications company Windstream Holdings has a
dividend yield of 9 percent, the highest in the S&P 500, while
Frontier Communications is third highest, with a yield of 6.2
percent, according to Thomson Reuters data. Those compare with the
S&P 500's dividend yield of 2.4 percent. They have gained 40 percent
and 37 percent this year, respectively.
"Where yield lies is where investors are continuing to go because
there continues to be no alternative from other income-producing
securities," said Mark Luschini, chief investment strategist at
Janney Montgomery Scott in Philadelphia.
(Reporting by Caroline Valetkevitch; Editing by Leslie Adler)
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