To The Moon

In recent years, the "Magnificent Seven" stocks have dominated the $S&P 500(.SPX)$ , driving it to new highs. However, in 2024, Utilities stocks have emerged as a new force behind the US stock market's rise. $Vanguard Utilities ETF(VPU)$ has become one of the best-performing Vanguard ETFs this year.

The Utilities sector is typically low-growth, so why is it suddenly gaining favor in the market? Is it still a good time to invest?

Advantages of Investing in Utilities Stocks

The US stock market has 11 sectors. Some, like Tech, Optional consumption, and Telecom, are packed with high-growth stocks. Others, such as Industrials and Financials, tend to soar during economic expansions. In contrast, the Utilities sector is often seen as dull and uneventful but is valued for its sustainability and stability.

The VPU holds many power utility companies. These companies often dominate their regional markets, with regulators and government agencies heavily involved in their pricing. This model means utility companies typically return value to shareholders through consistent and growing dividends.

Additionally, VPU includes water and gas companies, as well as those investing in renewable and fossil fuel energy projects. Currently, the ETF offers a dividend yield of 3.1%, more than double the S&P 500’s, while its P/E ratio (22.7) is lower than the S&P 500’s (27.9).

Another reason for the sector's standout performance this year is the catch-up effect. From 2021 to the end of 2023, the Vanguard Utilities ETF barely moved and lagged significantly behind the S&P 500. Often, when a sector or stock is quiet for a long time, it can make a big comeback.

In short, utility stocks are seeing a rebound, with lower valuations and higher dividend yields, making them suitable for risk-averse investors.

Understanding Utility Companies’ Dividends

Dividends or share buybacks are ways companies return value to shareholders, but they aren’t always the best use of capital. The key is how effectively and efficiently the capital is reinvested.

For example, companies like $Coca-Cola(KO)$ and $Procter & Gamble(PG)$ use most of their profits for dividends and buybacks, only pursuing acquisitions and market expansion when returns outweigh risks. This strategy fits their business models and provides steady passive income along with long-term capital growth.

On the other hand, companies like $Microsoft(MSFT)$ and $Apple(AAPL)$ , which have more growth opportunities, invest heavily in their businesses but also buy back shares and increase dividends. Meanwhile, firms like $NVIDIA Corp(NVDA)$ and $Amazon.com(AMZN)$ focus on market share and development, so their capital is directed towards reinvestment and innovation.

Different companies have different capital allocation strategies that suit various types of investors. Whether you’re into dividends or growth, high or low risk, utility stocks can play a balanced role in your investment portfolio.