Year-to-date, the Utilities ETF (NYSEARCA:XLU) has appreciated 21% and the big two telecoms, AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ), have also appreciated more than 20%. Those are amazing returns especially including the above-average dividend yields utilities and telecoms typically offer.
However, with the bid up prices, it has become riskier to invest new money in utilities and telecoms.
The top five utilities in the XLU are all overvalued, including NextEra Energy Inc (NYSE:NEE), Duke Energy Corp (NYSE:DUK), Southern Co (NYSE:SO), Dominion Resources, Inc. (NYSE:D), and American Electric Power Company Inc (NYSE:AEP).
Reversion to the mean can happen for any of these utilities that are overvalued, and it could mean negative returns in the short term.
However, they offer above-average yields compared to the market. Those yields are stable and growing. So, investors need to determine if it’s a priority to get their yields or if capital preservation or total returns are more important.
Like the utilities, AT&T and Verizon also offer higher yields than the market, but they are better valued than the utilities. AT&T is fully valued and Verizon is fairly valued.
Better values found in Tech
Technology companies such as Apple Inc. (NASDAQ:AAPL) and Cisco Systems, Inc. (NASDAQ:CSCO) look particularly discounted from a valuation standpoint.
On the other hand, Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG)(NASDAQ:GOOGL) trade at high multiples of 39.4 and 22.3, which are reasonable due to their higher growth rates.
This article is a general overview of my Seeking Alpha article:
Have New Money To Invest? Which Sectors To Buy? Which To Avoid?
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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