Utilities and REITs have been 2 of the more popular sectors for yield hungry investors over the last year. Over the last 3 years, they have moved largely in lockstep, and especially so in the past year. Their price action over the past months, as rates moved higher, was very similar. Here is the 3 year daily chart:
The ratio of XLU over IYR paints a picture of two sectors in lockstep as well. It has been at essentially the same level (around 0.54-0.60) for most of the past 3 years. Utilities outperformed a bit in the risk-off period in late 2011. Since then, the two have moved together:
The fundamental valuation of both of these sectors looks too high to me vs. their own history and vs. other high-yielding stocks in the market. For the utilities and slow-growing REITs, the P/E is in the high teens, with projected earnings growth of 0-5% over the next couple years. For the faster-growing REITs, the P/E is in the 20-30 range, with projected earnings growth of 5-15%. Yields are between 2.5-5% for most of the names in both sectors.
Low rates have obviously been a driver of richer valuations. But those looking for yields will find much better value in health care (read my detailed analysis of the top 10 health care names from last month). Staples are less attractive (another top 10 rundown from last month). Telecom, large-cap retail, and large-cap tech seem to offer decent value as well.
While the most recent selloff in utilities and REITs has been blamed on high rates, their elevated valuations leave little room for error. Buyer beware when in search of yield without regard to price.