Use Something Better than the RSI to Find the Strongest Utility Stocks

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. 

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 utility companies 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?
 

The Way "Strength" Is Measured Is Critical  

There is a very good reason for not using the RSI (Relative Strength Index) for determining the strength of utility stocks.  The problem with the RSI is that it changes too rapidly.  That's because it is usually based on a few days of price behavior.  A short-term trader would be interested in the RSI because it would detect price surges over a few days.  We provide the RSI on some of our own scan lists so users can see if there was a price surge on the day of the alert.  It serves a purpose similar to volume surge information on a breakout day.  However, what a utility investor needs is a list of stocks with persistent strength.  He is not interested in knowing which utilities had a price spike that lasted only a few days. The person who uses the RSI to rank utilities would end up having to adjust his portfolio (by selling and buying) every time the utilities are ranked according to their strength.  The Relative Strength Index (RSI) 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 rank algorithm goes far beyond the simplistic Relative Strength RSI used at other Web sites.  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 nearby 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). Stocks on the list created by our own strength algorithm, 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 screening results for the RSI and our much more sophisticated strength algorithm.  The RSI will list stocks highly that have terrible looking charts.  The stocks may actually be in a declining trend but ranked highly because of a minor "bounce" in price.  The charts of the stocks our algorithm finds actually look like charts of strong stocks.

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. 

Strongest

Strategy 1.  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 total return and strong price appreciation, go down the list starting at the top.  Check each stock's dividend until you find one that is acceptable (not necessarily those with the greatest yield).  In fact, if you want a portfolio that will give the highest total return, you could even buy ten utilities from the top of the strength list regardless of their dividends.  You might adopt an attitude in which the dividends are a bonus and not the primary objective.  Over time you will have invested in the strongest utilities and very probably will have picked up considerable dividend bonuses along the way.  There are other strategies you could use with our lists.

Strategy 2.  Suppose you want regular dividend income.  If you simply invested in utilities with big dividend payouts, some of those utilities might be in a downtrend and losing money.  Assume also that you want your portfolio to have strong growth over time.  If, you concentrate on building a portfolio that is always invested in the strongest utilities, you will very likely obtain occasional dividends.  However, even if a utility in your portfolio distributes no dividend at all or only a small dividend, you can still have the equivalent of dividend income from your positions.  Here's how.  The stocks in your portfolio will tend to be those that rise the most, generating unrealized capital gains.  When a utility falls out of the top 10 or top 30 list (or wherever you set your limit) it will be sold and the proceeds of the sale will be used to buy the highest ranking utility you do not own.  However, you would keep a small percentage of the proceeds of the sale and invest the rest.  Skimming a small amout of the capital gain to satisfy your income needs would give you a double benefit.  You would have a greater rate of growth than if you simply focused on yield when purchasing, and you would also have cash flow.  The amount you would set aside for your income needs would be based on how much you want distributed to you.  When you first implement the strategy, you could set aside a 6% to 10% cash balance in your account to make sure you could draw out, say 1.5% every quarter, regardless of whether or not any sales have been made for your portfolio.  The cash balance would be replenished when there is a sale.  The broker will send you your checks automatically on the schedule you request. All you would have to do is see to it that there are sufficient funds in the account to cover the payouts.  The money you draw from your account will include accumulated dividends and/or proceeds from your recent sales.  The account will likely be growing much faster than your accumulated withdrawals because you are investing in the strongest utilities at all times.  For another example, assume that you need a 5% cash flow from your utilities.  That would come to 1.25% per quarter.  In that case, you could invest 95% of your money and leave 5% in cash.  Then, every quarter you could draw out 1.25% of the cash balance.  Brokers will send you cash automatically from your account on a regular basis.  The cash portion of your account could be replenished from the proceeds of your occasional sales.  Again, you would have regular income and at the same time you would be invested in the strongest utilities (causing your portfolio to experience a relatively high rate of growth).

Strategy 3.  Simply choose the utilities on the list that have the greatest yield.  By definition the stocks on the list are currently the strongest among all the utility stocks.  That way you get both strength and high yield.  You could then sell any stock that falls off the list and buy another that is on the list and that has a high yield.

We have said nothing about how you can incorporate the PE ratio in a portfolio-building strategy, and PE ratios are included in the lists we provide.  You could, for example, use PE as a filter by rejecting any stock that has a PE ratio above a certain level.  The PE is determined by dividing the stocks price by the company's earnings.  If earnings are small then the PE will be large.  In other words, the stock is too expensive for the earnings generated by the company.

There are other ideas below the table.

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).

 [Notice: The strength algorithm is also used to generate our lists of "Strongest Stocks."  Click on that link (on the left side of your screen) to see a comparision of our algorithm results and that of the RSI.]

If our data vendor does not provide the earnings and dividend data necessary to compute a PE ratio or Dividend yield, then a "--" will appear in the PE or % Yield cloumn.  The earnings and dividend data used by us in computing PE and % Yield are updated once a week, but we compute the PE and % Yield daily, based on that data and the current price.  For example, if we update the raw data on Friday, but the company stops paying a dividend on Wednesday, our tables will continue to display a yield until the underlying dividend data is updated (updates usually occur on Friday or are "as of" Friday).

This service is not available at this time.  We are, however, taking indications of interest.  If enough people are interested, we will offer it.  Let us know of your interest by sending us an e-mail (see "Contact Us" page).  Simply say "I am interested in your Strongest Utilities subscription."  If enough people express interest, we will let you know it is available.   You may want to check out our lists of the Strongest ETFs     

Sample List (Strength Rank in Dark Red at Left of Name)
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Other Things You Can do When 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 a fee of $75 for a 6-month subscription or $135 for a 1-year subscription.  The highest ranked utilities arranged in rank order and the list is 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.

In Value Line’s SELECTION AND OPINION dated August 17, 1990, Milton Schlein, associate director at the Value Line Investment Survey, compared the relative merits of bonds and electric utility stocks. He examined the behavior of both types of investment from 1977 through 1989, because this period included wide movements in interest rates. He concluded that utility stocks have superior total returns whether interest rates were going up or down. During the worst period, when interest rates went up dramatically, bonds dropped more than 40% while utilities dropped less than half as much. Then, when interest rates were falling between 1981 and 1986, bonds went up 64% while utilities went up almost 100%. Schlein concluded that call provisions and maturity hampered bond performance while dividend increases helped utilities become far less sensitive to rising interest rates.

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