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This Boring Sector Could Deliver Triple-Digit Gains

By Dr. Steve Sjuggerud
Thursday, February 27, 2014

You probably didn't notice... But interest rates have fallen about 10% this year.
This is a big deal...
Interest rates have fallen from 3% at the start of the year to about 2.7% as I write. (That's the interest rate on the standard U.S. government 10-year bond.)
Not many people are talking about this big fall in U.S. interest rates. But they should be. It has caused issues... but it has also created opportunities.
You see, when interest rates go down, income-oriented investments go up in value. And one sector of the market typically does extraordinarily well in this environment.
I'm talking about utility stocks. Normally, I have no interest in utility stocks...
These are the companies that keep your lights on at home, for example. They are often heavily regulated, as the government doesn't want them gouging customers.
Utilities are typically boring businesses – and boring stocks. But not always...
When two specific things come together... you can make triple-digit gains in utility stocks. That was the case in 1956, 1974, and 2003. Today is no different.
The story is simple...
Any time the dividend yield on utility companies is one percentage point or more higher than the interest rate on 10-year Treasury bonds, you want to buy utility companies.
They've often delivered triple-digit returns over the next couple years.
You can see this in the chart below...
utilities vs dividend spread chart
Right now, the dividend yield on utility companies (at roughly 4%) is about one percentage point above Treasury bonds (at below 3%). Historically, the dividends on utility companies have been about one percentage point LESS than the government bond yield.
It wouldn't be a stretch for the stock prices of utility companies to soar from here. That would push the dividend yield on utilities down below government bond yields.
A fall down to 2% would put utility stocks around 1% lower than government bonds. That's back in line with historical norms, based on their dividends.
If that happened, you could make a 100% return on utility stocks. For example, let's say the price of a utility stock is $10 a share, and it pays a $0.40 annual dividend. That's a 4% dividend yield. If the stock price goes to $20, that $0.40 annual divided becomes a 2% dividend yield – and you made 100% in capital gains on your utility stock.
I am not predicting that we'll see a 100% move now – that would be a huge move higher for utility stocks. But based on history, the conditions are in place for a big move in the sector.
And based on history, triple-digit returns are possible.
You can easily invest in a basket of utility companies with the Utilities Select Sector Fund (XLU).
Shares of XLU pay a solid 4% dividend. And if utility stocks continue their move higher, you could pocket potentially large capital gains as well.
Check out shares of XLU...
Good investing,

Further Reading:

A few months ago, Dr. David Eifrig showed readers how to "time" the purchase of utility stocks. His strategies allow you to collect higher dividend payments and larger capital gains. Get all the details here.
"The Bond King [Bill Gross] says interest rates could stay low until 2035," Steve writes. "Are you prepared for that? Can you survive on 1% or less interest for decades?" Steve says if your retirement plan is to sit and wait and do nothing, you have no retirement plan. So what can you do? Find out here.

Market Notes


Homebuilders have "broken the box"... And it's a sign the next leg of the housing bull market is here.
In early 2011, Steve Sjuggerud told DailyWealth readers, "Right now is the best time in history to buy a house in America." He encouraged readers on the fence to go ahead and buy a house... And he recommended readers of his True Wealth newsletter buy the iShares U.S. Home Construction Fund (ITB). The fund holds shares in big homebuilders like PulteGroup. It also owns companies that do well in a good housing market, like Home Depot.
Shares of ITB shot higher from October 2011 through May 2013. Last month, we explained shares had been stuck in what traders call a "box"... But we told you that with home prices and existing home sales rising, and a limited supply of homes on the market, that "box" would soon be broken to the upside.
Yesterday, the Department of Commerce reported strong sales of new single-family homes for January... stronger than any month since July 2008. The news was unexpected... And as you can see below, it helped push shares of ITB to a six-year high.
As expected, ITB "broke the box" to the upside. The bull market in housing is still on.

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