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Real Questions from Real Subscribers

Q: My utility stocks have done really well and now look kind of expensive. Should I sell them or sit tight?

A: Dear Subscriber,

S&P 1500 utilities have delivered an average total return of more than 15% over the past 12 months, while S&P 1500 stocks have lost 6% on average. More good news for utilities arrived this week when the Federal Reserve said it now plans to raise its benchmark rate just twice in 2016. In December it had anticipated hiking interest rates four times this year. Utilities and other dividend-paying stocks tend to be highly sensitive to interest rates.

At the same time, utility stocks look pricey. The sector’s average Quadrix Value score has fallen to 45 from 75 at the end of June, sitting 33% below the average of 69 since December 1994. No other sector looks more expensive relative to historical norms based on the Value score.

Our advice: Remember why you bought utility stocks in the first place. Are they part of your efforts to maintain a well-diversified portfolio over a long time horizon? Do you need their dividend payments for a steady stream of income? If either scenario is true, feel free to keep them, because they should continue to satisfy both requirements. But if you own utilities solely for their return prospects over the next 12 or 24 months, consider other stocks that are cheaper and offer better operating growth. There’s a reason our buy lists don’t contain any utility stocks.

Thanks for your interest,

Bob Sweet, CFA
Managing Editor, Dow Theory Forecasts

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