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Investors aren't bringing sexy back

April 7, 2014: 4:02 PM ET

Boring is back.

In a choppy market, investors are shifting their strategy, eschewing the once sizzling sectors (think: tech) in favor of the more mundane variety (think: utilities).

Dividend-paying companies, long-considered a tad too defensive, are especially in vogue now.

Red hot names such as Tesla (TSLA) and Netflix (NFLX) have tumbled this month, while utility stocks, known for their healthy dividends, have jumped. The Utilities Select Sector SPDR Fund (XLU) is up over 9% this year. Its top holding, Duke Energy (DUK), sports a dividend yield of 4.4%.

"Investors are flocking to what is known as opposed to what is promised," said Jim Russell, Senior Equities Strategist for U.S. Bank Wealth Management.

The Utilities Select Sector SPDR® Fund has had a huge run this year.

Russell said the rotation comes as investors start to worry about possible weakness in first quarter earnings, which were likely hampered by unusually harsh winter weather. That, in turn, has caused them to fret about sky-high valuations.

Related: Brace yourself for ugly corporate earnings

"While there is a lot of promise there, we think some stock prices outran any kind of semblance of reality," he said.

Amazon (AMZN) , for instance, which has tanked about 20% this year, trades at almost 170 times 2014 earnings. That's compared to almost 16 times earnings for the S&P 500.

While the about-face is painful for investors who bet that the high fliers could continue to soar, it's vindication for those like Robert Browne, Chief Investment Officer for Northern Trust.

Browne said he's stayed away from many tech stocks with valuations he had trouble justifying. He instead likes to get paid in dividends, because they tend to instill discipline on company management.

"This past month has finally been some positive payback for us," he said.

But the shift from momentum stocks to conservative companies may be most pronounced in the healthcare industry.

Biotechnology stocks have pulled back sharply after swelling earlier in the year when investors bet that firms with promising drugs could deliver big returns. After rising more than 20% for the year by mid-February, the iShares Nasdaq Biotechnology ETF (IBB) is now in the red.

The iShares Nasdaq Biotechnology ETF has had a wild ride this year, and it now in negative territory.

At the same time, Merck (MRK) is up 11% year to date, and Johnson & Johnson (JNJ) has risen over 7%. Those healthcare giants pay dividend yields of 3.2% and 2.7%, respectively.

So what does it all mean?

Bumpy seas ahead, according to Michael Gayed, Chief Investment Strategist for Pension Partners in New York. In research dating back to 1926, Gayed found that periods in which utilities were popular were followed by greater overall market volatility.

And with the yield on the 10-year treasury note trading at a still low 2.7%, Gayed said investors are turning to dividends for steady income.

"There's a clear relationship between bond market movement and demand for dividends, they tend to compete with each other," he said.

Still, Russell predicts that the pullback will be short lived, even for momentum stocks. He believes that weakness in first quarter earnings will most likely be made up for with a strong second quarter.

Related: Momentum strategy: Skip stocks, go for sectors

But in the meantime, dividends are a safe bet.

"The dividend feature is awfully appealing," he said. "It's a nice place to hide for a little while."

As the markets continue a three-day dive, investors are looking for those safe harbors.

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Jesse Solomon
Jesse Solomon
Reporter, CNNMoney

Jesse Solomon is a reporter for CNNMoney’s markets and investing section. He covers stocks, bonds, currencies, alternative investments, emerging markets and mergers and acquisitions. He previously worked as an Associate Producer for CNN, where he covered the Boston Marathon bombing, Superstorm Sandy and other big, breaking news events.

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