Beyond the Fed

From June 2004 to June 2006, the US Federal Reserve raised the benchmark interest rate by 425 basis points to 5.25 percent. Over this period, the Dow Jones Utilities Average generated a total return of more than 61 percent.

Utility stocks stumbled a bit in the early part of 2004, when speculation swirled that the Fed would raise interest rates. But once the central bank made its move, these stocks recovered swiftly.

Bottom Line: During the Fed’s most recent tightening cycle, the Dow Jones Utilities Average posted its second-best two-year return since World War II.

Market history is one reason we’re not concerned that rising interest rates will sap our favorite dividend-paying utilities.

And the prospect of elevated volatility in the near term creates opportunities, enabling us to add high-quality names to our model Portfolios at favorable entry points.

Meanwhile, a combination of attractive valuations, low costs of capital and the never-ending quest for scale has fueled a wave of utility mergers and generated windfall profits for lucky shareholders.

This month’s feature article highlights three strategies for investors to profit from the upsurge in mergers and acquisitions in the utility and telecom sectors.