Here’s How to Play Utilities for Dividends

For retirees, there’s a huge risk in buying Treasuries and other high-grade bonds at today’s yields. If inflation picks up from current low levels, your 2% yield on a 10-year T-note could hand you a significant loss of purchasing power (particularly after taxes). What’s more, history teaches that rising inflation usually begets higher interest rates. Higher rates push down the resale value of existing bonds. Because the T-note’s yield is fixed for the term of the security, you would probably have to take a capital loss if you wanted to exit the holding before maturity.

Utility stocks, by contrast, can sweeten their dividends over time — and most do. Dividend increases give you a hedge against inflation and rising interest rates. For new money, therefore, I definitely prefer utility stocks over most high-grade bonds. If your taste runs to individual stocks, my first utility pick at the moment continues to be Atlanta-based gas distributor AGL Resources Inc. (NYSE:GAS). Keep an eye on electric utility Duke Energy Corp (NYSE:DUK), too. Finally, for the fund investors among us, I recommend Utilities SPDR (ETF) (NYSEARCA:XLU) as an easy, one-stop entrée into the entire electric-and-gas industry.

Source: InvestorPlace

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