You might think us crazy but we’re buying the worst performing sector in the market this month, utilities. In particular we are buying the XLU and Dominion Resources. XLU,S&P Select Utilities fund represents a basket of the largest public utilities in the country yielding about 4.18%. The utilities index is down a stomach sickening 8.34% for the month of November alone. This is the biggest one month drop since the market collapse of 2008. Is the elimination of favorable tax treatment on dividends as big a threat as indicated by the collapse of the index. We don’t think it is. Don’t get us wrong, we know how to do the math. A change in taxable rates from 15% to ordinary income rates is a big deal. That is if all things are equal and they’re not. First of all, it’s not going to happen that way. Already the President has stated his willingness to extend the tax cuts for those making less than $200,000 or $250,000 filing jointly. So marginal rates at worse only start rising on the dividends received after $250,000. This also has a good chance of getting watered down as dividends are already taxed once as corporations pay them after paying income tax.
This is a trade idea. We’re not utility investors or dividend investors necessarily. Normally utilities are the recession resistant play greatly impacted by interest rates. Today they are on sale while rates are going down and the economy threatens to slow down. They should be going up not down or at least performing better than the market at large. Buy the XLU or the Vanguard Utilities ETF, VGU. On an individual play we like Dominion Resources, D, a lot since it has both large insider buying at these levels, a healthy dividend, and exciting non-regulated growth opportunities with its LNG export facilities underway at Cove Point. Dominion is one of the best positioned companies to benefit from America’s natural gas bounty, particularly since it sits on the biggest play in the world, the Marcellus Shale. Admittedly though, that’s not going to happen before 2017.
