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5 Utility Stocks to Buy on Fed's Dovish Stance

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Minutes of the Fed's September meeting released this Thursday have cast doubts about whether the Fed will hike interest rates this year. The central bank decided to keep interest rates near zero in the September policy meeting. Turmoil in the financial markets and slowdown in the Chinese economy were cited to be the reasons behind the Fed's dovish stance.

Meanwhile, September's weak jobs report has also taken this year's rate hike off the table. As a result, companies that stand to gain from low interest rates are expected to reap the benefits for some more time. Ultra-low interest rates have boosted utility stocks for the last six years. In this climate of volatility, it will be wise to continue investing in utilities. Invest in them as they are a better choice than bonds since they offer regular dividends.

Fed's Dovish Stance

Investors traced further signs of dovishness from the minutes of the Federal Reserve's September policy meeting. The central bank clarified that volatility in the financial markets and concerns about China's economic slowdown compelled them to keep interest rates at near-zero levels.

The weak Chinese economy raised concerns about global economic growth. Turmoil in the financial markets was fueled by a persistent slowdown in the Chinese economy. While all the major indexes moved in and out of their correction territory to end a volatile August in the red, familiar concerns surrounding China dampened investor sentiment last month.

Many Fed officials in the September meeting acknowledged the fact that these factors increased downside risks to economic activity. They believe that it will be a "prudent" decision to wait for more data to confirm the economy's growth before deciding on hiking rates.

Weak Jobs, Inflation Data

The Fed's decision in the policy meeting came in before September's weak jobs report was released. Lackluster jobs data last month raised worries about economic growth, eventually cooling expectations of a rate hike this year.

The Labor Department reported that the U.S. economy added 142,000 jobs in September, well short of analysts' expectations. Employment gains for the previous two months were also trimmed by a combined 59,000.

Meanwhile, other economic reports did not paint an encouraging picture either. The ISM Manufacturing Index, construction spending, factory orders and capacity utilization all came in below expectations.

Fed officials also wanted the inflation rate to move up to the desired target of 2% before raising rates. Some Fed voting members during the meeting said their confidence that inflation will climb to 2% "had not increased" since the July meeting. They also said that the current global economic developments have placed further downward pressure on inflation in the near term. Fed staff estimated inflation won't be able to touch the 2% goal even by the end of 2018.

Dovish members in the policy meeting argued that a rate hike soon will drag inflation lower. Nine out of 10 Fed members said that rates will remain steady in September, with the only exception being Richmond Fed President Jeffery Lacker.

5 Utility Picks

Investing in utility stocks will be a good idea if the low interest rate persists for the time being. Utilities are a capital intensive business and the funds generated from internal sources are not always sufficient to meet their requirements.

Hence, these companies have a high level of debt loads. Low interest rates will help them pay off debts and book profits. Our selection is also backed by good Zacks Value Score and Zacks Rank.

We narrowed down our choices with the help of our new style score system .

Our research shows that stocks with a Value Style Score of 'A' or 'B' when combined with a Zacks Rank # 1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.

Ameren CorporationAEE provides energy services to customers in Missouri and Illinois.

AEE holds a Zacks Rank #2 (Buy) and has a Value Style Score of 'B.' AEE has a dividend yield of 3.89%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 16.48. The company's price/earnings to growth ratio (PEG) is 2.41, in contrast to the industry's negative PEG ratio of 3.19.

American Electric Power Co., Inc.AEP engages in the generation and distribution of electricity for sale to retail and wholesale customers.

AEP holds a Zacks Rank #2 (Buy) and has a Value Style Score of 'B.' AEP has a dividend yield of 3.78%. It has a P/E (F1) of 15.57x. The company's PEG ratio is 3.23, in contrast to the industry's negative PEG ratio of 3.19.

Atmos Energy CorporationATO distributes and sells natural gas to residential, commercial, agricultural and other customers.

ATO holds a Zacks Rank #2 (Buy) and has a Value Style Score of 'B.' ATO has a dividend yield of 2.66%. It has a P/E (F1) of 18.15x. The company's PEG ratio is 2.63, less than the industry's PEG ratio of 2.86.

PPL CorporationPPL is an energy and utility holding company.

PPL holds a Zacks Rank #2 (Buy) and has a Value Style Score of 'B.' PPL has a dividend yield of 4.63%. It has a P/E (F1) of 14.85x. The company's PEG ratio is 6.33, in contrast to the industry's PEG ratio of 3.19.

DTE Energy CompanyDTE is a Detroit-based diversified energy company involved in the development and management of energy-related businesses.

DTE holds a Zacks Rank #2 (Buy) and has a Value Style Score of 'B.' DTE has a dividend yield of 3.63%. It has a P/E (F1) of 16.90x. The company's PEG ratio is 3.23, in contrast to the industry's negative PEG ratio of 3.19.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

AMEREN CORP (AEE): Free Stock Analysis Report

AMER ELEC PWR (AEP): Free Stock Analysis Report

DTE ENERGY CO (DTE): Free Stock Analysis Report

PPL CORP (PPL): Free Stock Analysis Report

ATMOS ENERGY CP (ATO): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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