Why Not Focus On The Strongest Utility Stocks?

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Utilities, on average, tend to pay larger dividends than most stocks. When utilities do well financially, they tend to increase their dividends.  When a utility does well financially, its stock also tends to rise.  That is why some utilities that give the greatest total return do not have the highest current yield.  For example, assume a utility called Universal Power has a stock priced at $100 and that it has a dividend of $4 giving a yield of 4%.  Because the company is doing so well and because of the attractiveness of its dividend, investors bid up the price to $150.  Now the yield is 2.66%.  The yield at that level may not look as attractive as some other utilities.  However, the company is very strong and has a "habit" of increasing its dividends.  Assume it raises its dividend $2 so that its yield is again 4%.  Consequently, investors buy more stock and drive the price up to $250.   Now the yield is 2.4%.  Other utilities might look much more attractive because they have a higher yield, but the original investor is getting 6% in dividends not 2.4%, and has had a capital gain of 150%.  Investors have bid up the price because of the operation's financial strength and superior dividend growth potential.  When the price rises, the yield of a given dividend declines.  However, such companies tend to have a pattern of increasing dividends because they can afford it and because they are doing well financially. 

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What is the lesson here?  If you are looking for the greatest total return, focus on stocks that have the strongest pattern of price appreciation and do not turn away from a stock just because it does not have the highest current yield.  Though a person who invests in a stock with a pattern of modest appreciation and a relatively high yield should do well over time, a person who invests only in those utilities that have the strongest stocks (and who adjusts the portfolio throughout the year whenever necessary to keep it invested in the very strongest of utility stocks) should do even better, even if the current yield of the portfolio's stocks is somewhat lower.  This strategy should not only reap outsized gains through capital appreciation, but also capture some nice dividend bonuses along the way. 

What if you need the highest dividends possible?  Do not simply go for the largest yield.  There may be a reason the yield is so high.  For example, say the stock is priced at $100 and pays a dividend of $4 or 4%.  Then, bad news hits the company.  Perhaps a nuclear facility has had radiation leakage or the firm becomes entangled in a lawsuit and is charged with defrauding their customers.  The company's stock will plummet.  If the stock suddenly drops to $60, its yield will be 6.66%!  The person who buys the stock may think he is getting a great deal, but what will he think when the stock is selling for $5 and the dividend is discontinued? 

Again, start with a list of the strongest utilities and then review their dividends.  We list these utilities in order of their strength rank.  There is a reason those utilities are so strong.  Therefore, if you want a stock with a very high dividend and strong price appreciation, go down the list starting at the top.  Check each stock's dividend until you find one that is acceptable.  Then look up its pattern of dividend increases.  In fact, if you want a portfolio that will give the highest total return, you could buy ten utilities from the top of the strength list regardless of their dividends.  You could consider the dividends a bonus and not the primary objective.  Over time you will have invested in the strongest utilities and very probably will have picked up dividend bonuses along the way.     

Whatever your objective, we believe the best starting point is strength, not current yield.  By focusing on consistent strength, you have a better chance of avoiding stocks that have a high yield because their stocks are in trouble.  We create a list of the Strongest Utilities arranged for you in rank order and updated daily.  Below, we give strategies for creating a utility portfolio based on these lists.  Pay close attention to the following, because it makes all the difference in the execution of a successful discipline. 

Our strength rank algorithm goes far beyond the simplistic Relative Strength RSI used at other Web sites. The Relative Strength Index is an oscillator that ranges between 0 and 100 and is based on the ratio of upward price changes to downward price changes over a short period of time (usually 14 days).  Our own strength indicator is far more sophisticated. If you scan 2000 stocks with the Relative Strength Index, you will find that many of the stocks that rank high are not really attractive because of overhead resistance or because the surge of strength measured is not really significant for some other reason (a non-significant rebound in a very unattractive or threatening chart pattern). The list selected by our own strength screens, however, will look much more attractive. The more stocks that are screened, the greater the difference will be in the quality of output. To see an illustration of how the output of the two systems can differ, visit the Strongest Stocks page. We use the same algorithm there that we use here, and we have included some charts there that illustrate the difference in screen results for the RSI and our much more sophisticated strength algorithm.

The master list that we use in our rankings includes electric utilities, telecommunication service companies, gas utilities, and water utilities. The utilities we post in our ranking list will be the "strongest" 30 at the time of posting (ranked in order of strength).

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Sample List (Strength Rank in Dark Red at Left of Name)
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Strategies For Using The List 

If you know how to read a chart and how to determine the location of support, you might try fine tuning your entry points. For example, you might put the more attractive utilities on a "watch list" and review their charts daily, waiting for one of them to decline to its rising trendline. Then, as it begins to rebound off this support line, you could buy it for your portfolio. Your sell strategy might consist of selling any utility that falls below its supporting trendline.  Another way to approach it is to focus on those utilities that have just moved up in rank (a move up in rank suggests new momentum or an increase of public interest in that utility). You do not have to know much about charts to create a powerful portfolio.  For example, you might buy the top 10 utilities and sell any that fall out of the top 10. Then you could replace it with the new stock in the top 10 that you do not currently have in your portfolio.  You could loosen up a little on the rule for selling by allowing a stock to fall below the top 30 before selling (when it drops off the list).  Though stocks in the top 30 are still relatively strong, you might want to replace those that fall below the top 30 in order to keep your portfolio concentrated on the strongest utilities.  You would most likely replace the ejected stock with a utility from among the top 10 that you do not have.  For your convenience and for easy reference, the relative rank of each utility is posted to the left of the utility’s name.  This concept is quite flexible.  You could build your portfolio around 5, 7, or 10 positions, based on your portfolio size, investment needs, objectives, and tolerance for risk.  [The utility in the 30th position is always in bold blue type, but no special meaning is implied by this.] 

There are many ways you could define your selling strategy. You could sell any utility that drops 7% below your purchase price or below the highest low reached by the utility since its inclusion in your portfolio.

Of course, some of the strongest selling disciplines factor in volatility.  This is where the Stops tool can be a big help. Click on Stops (on the navigation bar or in the set of links at the bottom of this page) for more information on this.

A portfolio that is always invested in the top 30 utilities should do quite well over time. We would expect it to perform much better than most of the better performing mutual funds. Then there is the probability that many of the stocks selected over the course of the year will also pay great dividends. Combining both high dividends with stock strength should result in a very high total return.

Unless you have selected a strategy that requires it, it is not necessary to monitor a utility portfolio on a daily basis. Portfolio adjustments can be made once a week or once a month, depending on your strategy. We once managed a utility portfolio strategy that required adjustments only once a quarter, and its average annual return was about 20% a year for over 15 years after fees and expenses. Those who are bent on obtaining the highest level of performance might want to fine-tune their entry points for new positions by monitoring the charts of purchase candidates (their "watch list") each day after the market's close. Once they make their purchases and set their stops, they could then make weekly rather than daily reviews. Others will simply look at the charts of highly ranked utilities once a week and make their decisions on the basis of their weekly reviews.

The strength algorithms used in generating the list are the same as the ones used for The Valuator's "STR RANK" (Strength Rank) measurement and in its "Highest Strength List." We have said that the calculations are far more complex than the simple RSI Index calculations used to measure "strength" at most Web sites.  To give you an idea of what we mean by "more complex," we will say that it requires 6 algorithms for the first sort and then 3 more algorithms are applied to the results of the first sort to derive the final scores. The results of the latter are then ranked and the top 30 are listed here.  Lists based on the RSI are far more likely to have "setup" problems. 

Our algorithm is proprietary and it is far more effective than the Relative Strength Index (RSI) at finding securities that are really strong. If you haven't already done so, we urge you to use the "Strongest Stocks" tab on the navigation menu to see some charts that illustrate the difference between the selections made by using the RSI and those made by using our algorithm. It took time and effort to test and perfect our algorithm, and it is available nowhere else on the Internet. The costs to operate a Web site are greater when that site provides unique content (we do not obtain our content through the use of "cookie cutter" uploads and we do not clutter our site with third-party advertisements). Therefore, in order to get a modest return for our efforts, we are charging an annual fee of $75 for the complete list of the 50 highest ranked utilities arranged in rank order and updated daily.

You may be able to find free lists elsewhere on the Internet, but those lists will almost certainly be made by using the RSI. [It is standard practice to use the RSI to find strength in stocks because it is a cheap, quick, and easy pre-packaged upload for Web sites that do not have the mathematical expertise necessary to create more effective screening algorithms. At Stock Disciplines we do our own "number-crunching," model creation, system testing, and algorithm development. Even our Stops tool was created in-house] The RSI will often rank a stock highly even though it has a terrible or even threatening chart configuration and dominating overhead resistance nearby while completely missing a stock with a much better chart pattern or even a pre-surge "setup" and more persistent strength. Our algorithm avoids that problem. Its lists actually do consist of the utilities with the greatest persistent strength arranged in rank order.