Utility Stocks Are the Most Oversold Since 2023

XLU just posted its steepest monthly drop in nearly two years, and one analyst sees the floor still a painful distance away. Here is what rising Treasury yields and a regulatory curveball mean for income investors holding on through the…

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The Utilities Select Sector SPDR ETF (NYSEARCA:XLU) fell 6% over the past month, while the S&P 500 rose less than 1%.

XLU now trades near $40, about 17% below its 52-week high of $48.

This year the fund is down 5%. The S&P 500 is up 12%.

Most XLU holders own it for the dividend. The ten-year Treasury now pays more than 5.2% while XLU yields about 3.05%, according to StockCharts.

When a risk-free bond pays that much more, income money moves to bonds and utility prices fall until their yields compete again.

The Federal Reserve also raised its target upper bound to 4% in September, making borrowing more expensive for utilities that spend heavily on equipment and infrastructure.

A federal energy regulator put a five-month hold on a plan by the largest U.S. grid operator to buy backup capacity, hitting independent power producers inside the fund.

XLU weights holdings by size, so a few companies drive results. NextEra Energy (NYSE:NEE | NEE Price Prediction) is the largest at 13%. Constellation Energy (NASDAQ:CEG) at 7% and Vistra (NYSE:VST) at 4% are merchant generators that rose on data center demand. Someone still has to power and cool the expansion, and we rounded up seven suppliers doing exactly that in a free report on the AI infrastructure trade.

A regulated utility earns returns set by state commissions. A merchant generator sells power at market prices, so delays in capacity buying cut directly into expected earnings.

StockCharts’ Mike Zaccardi says the selloff is the sharpest since October 2023, with his momentum reading in the low 20s.

The fund trades 11% below its longer-run average price, per StockCharts, though a slide alone says nothing about dividends.

Zaccardi warns that “XLU could very well reach the psychological -20% threshold,” and sees a possible slide to between $35.50 and $36.50. Anyone holding at today’s price could end up owning it through that decline.

For an income holder sitting through a price decline, what matters is whether the payout holds. XLU’s payout ratio is 58%, so it has a good buffer.

That ability to grow sets utilities apart from Treasuries, whose coupon stays fixed. Utility dividends usually rise as companies grow their asset base, and over a long holding period that growth can lift a lower starting yield above a fixed coupon.

Over five years, XLU’s price rose 44% versus 76% for the S&P 500, so the case for owning it rests on income, not price gains.

XLU suits a long-horizon income holder who wants a growing dividend and can bear further decline. Position size depends on how much further decline a holder can bear.

It works poorly as a bond substitute. Treasuries currently pay more with far less price risk.

Contact [email protected] for any questions or corrections.

Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth, cyclical, and dividend equities that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as penny stocks.

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