Interest Rates Are Higher – So Why Are Utility Stocks Up Too?

One of the most common questions we have been asked in our 40-plus years of utilities investing is “What will happen to utility stocks in a rising rate, inflationary environment?”

That question is certainly valid today given the most recently reported inflation figure of 7.9% and the U.S. 10-year Treasury Note yielding close to 2.5% for the first time since 2019. Inflation has not reached this level since 1981, which is why we believe looking back is relevant in assessing how utility stocks might perform in the current period of high inflation and rising interest rates.

In the 10-year period from 1973 to 1982, the annual inflation rate averaged 8.7% and the yield on the 10-year U.S. Treasury Note increased from 6.2% to 13.0%. Many might be surprised to see that utilities performed well during this difficult macro environment and outpaced inflation.


Table 1.

Inflation Rate (CPI)*
Dow Jones Utility Average**

Source: U.S. Bureau of Labor Statistics (CPI); Bloomberg (DJ Utility Average)
*CPI = Consumer Price Index; data represents the annual rate of increase in the Index.
**Dow Jones Utility Average is used in this table as data for the S&P 500 Utilities Index was not available for these time periods.
Performance shown includes reinvestment of dividends.


More recently, we are encouraged by the relative strength of the utilities sector over the past two quarters as inflation and interest rates have moved to the forefront of many investors’ minds. The chart below highlights how year over year CPI has continued to rise over the past two quarters after exceeding the 6% level in October of last year. Over the same period, utilities are the second-best performing sector in the S&P 500 Index.


Table 2.

Time Period
Inflation Rate (CPI)*
S&P 500 Utilities Index
Q1 2022** 7.7% 2.5%
Q4 2021 6.7% 12.9%

Source: U.S. Bureau of Labor Statistics (CPI); Bloomberg (S&P 500 Utilities Index)
*CPI = Consumer Price Index; data represents the average annual rate of increase in the Index during the quarter.
**CPI data for Q1 2022 is the average for January and February; March data has not yet been reported.
The performance of the S&P 500 Utilities Index for Q1 2022 is for the period from 12/31/21 to 3/25/22 and includes the reinvestment of dividends.


In several previous blogs, we have stressed our view that utilities deserve consideration as an alternative to bonds given that bond yields are still relatively low on a historical basis and well below the current level of inflation. In addition, if interest rates should continue to rise, the total return from bonds in the next few years has the potential to be negative. In contrast, the underlying fundamentals of the utility sector, based on our analysis, are strong and we expect continued growth in earnings and dividends for many companies in the sector.

Since 2000, as shown in Table 3, utilities have outperformed bonds, on average, in the eight quarters in which the yield on the U.S. 10-Year Treasury Note moved higher by 50 basis points or more.


Table 3.

Change in Yield of U.S. 10-Year Treasury Note
(basis points)
S&P 500
Utilities Index
U.S. Aggregate Bond Index
Q1 2022* 96 2.5% -6.9%
Q1 2021 81 2.8% -3.4%
Q4 2016 85 0.1% -3.0%
Q2 2013 65 -2.7% -2.3%
Q4 2010 77 1.1% -1.3%
Q2 2009 82 10.2% 1.8%
Q2 2008 54 8.0% -1.0%
Q2 2004 76 -1.3% -2.4%

Source: U.S. Federal Reserve (10-year UST yields); Bloomberg (S&P 500 Utilities Index & Bloomberg U.S. Aggregate Bond Index)
*Data for Q1 2022 is for the period from 12/31/21 to 3/25/22 and includes reinvestment of dividends.


Explaining how and why utility stocks have managed to generate attractive returns during previous periods of sustained inflation and/or rising rates, we believe, is due to the growth of their dividends. The Reaves investment team has traditionally favored utilities with the ability to grow their earnings and dividends at an above average rate. Based on the guidance provided on recent earnings calls, we think that dividend growth for most utility companies can be maintained or increased over the next several years.

It is our view that elevated inflation and rising interest rates are not reasons for utilities investors to panic. We think it is more important to focus on the sector’s unique defensive characteristics and ability to consistently grow dividends and earnings Unlike bonds, which distribute a fixed rate of income to investors, the potential for a growing stream of income from well-managed utility stocks offers the potential for returns that can outpace inflation.


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Disclosures and Definitions:
Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The 10-Year U.S. Treasury Note (UST) is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-Year U.S. Treasury Note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. The U.S. government partially funds itself by issuing 10-Year U.S. Treasury Notes.

The Dow Jones Utility Average (“DJUA”) is one of the Dow Jones index groups that tracks the performance of 15 prominent utility stocks traded in the United States. It is a price-weighted average. Dow Jones first created the DJUA back in 1929 after removing all utility stocks from the Dow Jones Industrial Average.

The S&P 500 Utilities Index is a market-cap-weighted stock market index comprised of those companies included in the S&P 500 that are classified as members of the utilities sector.

The Bloomberg U.S. Aggregate Bond Index is an index comprised of approximately 6,000 publicly traded bonds including U.S. Government, mortgage-backed, corporate, and Yankee bonds with an approximate average maturity of 10 years.

Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account.

All investments involve risk, including loss of principal.All data is presented in U.S. dollars.
Cash is cash and cash equivalents.
An investor cannot invest directly in an index.
Important Tax Information: Reaves Asset Management and its employees are not in the business of providing tax or legal advice to taxpayers. Any such taxpayer should seek advice based on the taxpayer’s own individual circumstances from an independent tax adviser.
Fees: Net performance reflects the deduction of advisory fees which are described in detail in our Form ADV Part 2A.
Please contact your financial professional, or click the following links, for a copy of Reaves’ Form ADV Part 2A and Form CRS.
Additional information about Reaves may be found on our website:
2022 © Reaves Asset Management (W. H. Reaves & Co., Inc.)


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