Deutsche Bank Loves High-Yielding Utilities: 4 to Buy Now

By Lee Jackson Published Jul 6, 8:10AM EDT

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With looming interest rate increases, all the bond proxies have been hit hard. Utilities, real estate investment trusts (REITs) and energy master limited partnerships (MLPs) all had a very tough first half of 2015. A new research note from Deutsche Bank says that utilities are cheap, and all the quality companies yielding 4% or more make very good sense for the last half of 2015. Other top Wall Street firms are starting to join in the chorus for the utility stocks.

The Deutsche Bank team expects the Federal Reserve to start hiking rates in September and continue through 2016. They also think the climb in long-term yields will be limited, the yield curve actually flattens and fed funds will be at 2% and the 10-year Treasury yield at 3% by the end of 2017. If they are correct, then utilities are a great place for yield investors to stay put or initiate positions in.

We screened the S&P 500 utilities for top stocks that are currently yielding more than 4%

Duke Energy Corp. (NYSE: DUK) is the largest market weighted stock in the S&P 500 utilities at 8.62%. The stock is one of the leading U.S. utility companies, given its stable earnings base, as a significant portion of the company’s earnings are derived from regulated operations. Also, the company has delivered a healthy financial performance in the past and remains an attractive option for income-seeking investors.

Duke shareholders are paid an outstanding 4.38% dividend. The Thomson/First Call consensus price target is $81.12. Shares of Duke Energy closed most recently at $72.53.

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Entergy Corp. (NYSE: ETR) is an integrated energy company engaged primarily in electric power production and retail distribution operations. Entergy owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, including nearly 10,000 megawatts of nuclear power, making it one of the nation’s leading nuclear generators. Entergy delivers electricity to 2.8 million utility customers in Arkansas, Louisiana, Mississippi and Texas. Entergy has annual revenues of more than $12 billion and approximately 13,000 employees.

Entergy investors are paid a generous 4.62% dividend. The consensus price target is $81.40. Shares ended last week at $71.88.

PPL Corp. (NYSE: PPL) is among the leading utility companies in the United States and plans to continue to increase regulated operations and lower earnings volatility attached to competitive operations. Also, the company has diverse geographical operations, with operations in the United Kingdom and the United States. PPL raised cash and lowered debt late last year by selling some hydroelectric assets to NorthWestern energy.

PPL investors receive a solid dividend, which comes in at a generous 5%. The consensus price target is at $35, and PPL closed most recently at $29.80 per share.

Southern Co. (NYSE: SO) is the premier energy company serving the Southeast through its subsidiaries. A leading U.S. producer of clean, safe, reliable and affordable electricity, Southern Company owns electric utilities in four states and a growing competitive generation company, as well as fiber optics and wireless communications. Its brands are known for energy innovation, excellent customer service, high reliability and retail electric prices that are below the national average.

Southern investors are paid a very rich 5.06% dividend. The consensus price target is $45.47. The shares closed at $42.89.

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The Deutsche Bank team makes solid points when they remind investors that utilities have little if any currency issues, have better dividend support than telecoms, have the lowest sector price-to-earnings (P/E) ratio at 15.5, and the dividends are taxed as dividend income instead of ordinary income, like REITs and MLPs. These are all very good reasons to stay with them now, or add to portfolios seeking income and safety.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.