Investors heaved a sigh of relief as most of the central bank officials favored to end the runoff of the Fed’s balance sheet this year. The Fed also expressed uncertainty over raising rates further in 2019, going by the minutes of its January meeting.
The Federal Open Market Committee’s (FOMC) Jan 29-30 meeting showed that almost all participants thought it would be ideal to stop reducing the Federal Reserve’s asset holdings later in 2019. The Fed’s dovish position on further rate hikes, by the way, makes it sensible to invest in dividend-yielding stocks such as utilities, which could thrive in a no-rate-hike scenario.
Interest Rates at Bay
A gauge of encouraging economic factors such as strengthening labor market conditions, a low unemployment rate, strong gross domestic product growth and inflation near the 2% target were taken into consideration by Fed officials as they expected sustained growth, the minutes revealed.
In addition, Federal Reserve Chairman Jerome Powell had stated on Jan 30 that the Fed would be patient when it came to altering its monetary policy. The Fed took into account economic headwinds that could be potential risks for the U.S. economy such as slowing growth in Europe and China, U.S.-China trade negotiations, the United Kingdom’s exit from the European Union and the five-week-long federal government shutdown. The Fed concluded that stagnating further rate hikes posed fewer risks to a strong economy.
The encouraging domestic economy and an uncertain global economic outlook are the major reasons behind the Fed’s decision to hold its gradual rate hikes.
Utilities Could Gain From Fed’s Dovish Stance
Utility companies could reap significant gains from the Federal Reserve’s decision to leave rates unchanged this year. This is because the borrowing costs of these companies will remain constant in the near future, thus helping them to avoid incurring additional costs on their expensive business models.
Second, utility companies offer products and services such as electricity, water, gas and HVAC (heating, ventilation and air conditioning) that are always in constant demand irrespective of stock market volatility or economic downturns. The consistent revenues of these companies stem from their stable business models and near-absolute authority in the regions where they operate.
Thus, the operational nature of these businesses allows them to maintain a decent level of dividends for their shareholders along with offering moderate risk levels. In addition, the Utilities Select Sector (XLU) has gained 13.8% on a year-over-year basis, making it the second sector that gained the most after real estate (14.2%). Therefore, betting on utility stocks could be ideal at present.
5 Stocks to Buy
We have selected five stocks from the utilities sector that could gain from Fed’s rate hike pause. All of these equities carry a Zacks Rank #2 (Buy).
Consolidated Edison, Inc. (ED - Free Report) engages in the business of regulated energy, steam and gas delivery. The company mostly sells electricity to commercial, industrial, governmental and residential customers. Consolidated Edison’s Zacks Consensus Estimate for earnings rose 0.2% in the last 30 days. The company has a dividend yield of 3.8% against the Zacks Utility – Electric Power industry’s yield of 2.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Edison International (EIX - Free Report) generates, transmits and distributes electricity. Edison International’s Zacks Consensus Estimate for earnings rose 0.7% in the last 30 days. The company has a dividend yield of 4%.
Alliant Energy Corporation (LNT - Free Report) is a utility holding company that offers regulated natural gas and electricity services. Alliant Energy’sZacks Consensus Estimate for earnings rose 0.9% in the last 30 days. The company has a dividend yield of 3.2%.
OGE Energy Corp. (OGE - Free Report) provides energy and energy-related services. The company has two segments of business, namely natural gas midstream operations and electric utility operations.OGE Energy’sZacks Consensus Estimate for earnings rose 0.5% in the last 30 days. The company has a dividend yield of 3.5%.
Spire Inc. (SR - Free Report) operates as a buyer, retail distributor and marketer of natural gas to industrial, commercial and residential users. The company has two segments of business, namely natural gas midstream operations and electric utility operations.Spire’sZacks Consensus Estimate for earnings rose 0.8% in the last 30 days. The company has a dividend yield of 3.1% against the Zacks Utility – Gas Distributionindustry’s yield of 2.8%.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>