Are You In A Love Affair With These Stocks?
The love affair between investors looking for strong yields and utility stocks has been a strong one.
Some might say it’s been passionate and profitable for years!
Why all the focus on utilities? Why does a boring industry get all the attention?
The reason for this romance is stability. People pay the electric bill in good times and bad. If you’re hurting financially, or have recently lost your job, you tighten your belt… you stop eating out, you cancel a vacation. Things have to get very desperate for you to shut off your utilities!
As a result, utility stocks tend to weather the stormiest market downturns.
There is another reason utility stocks are loved by the savvy investors…
It’s all about government regulators.
You see, most utilities are regulated in one way or another. Now, this isn’t the place to debate weather regulation is good or bad… what I want you to focus on is the end result.
Regulators usually have a way of giving utilities a good share of their requested rate increases. And they almost guarantee a well run utility will generate a nice tidy profit year in and year out.
To top it off, as if stability and regulated profits wasn’t enough, you also have the benefit of yield.
Because the utility company doesn’t invest as much of its profits in future growth as another type of business, it can be more generous returning profits to shareholders through dividend payments.
When dividend investors look at the different industry sectors that are generous with yields, utilities are ALWAYS close to the top of the list.
But you don’t just profit from dividends…
How Utility Stocks Perform
You see in addition to dividends, utility stocks… the good ones anyway… have the opportunity for long-term capital appreciation. It won’t be a lot… remember, those regulators, while helping insure profits, are also limiting revenue growth.
So while the long term capital appreciation may be lackluster, the total return, when you add in the dividends paid, can be attractive.
Here’s an example.
Between December 1998 and March 2013, the S&P Utility Sector delivered cumulative total return of 101% and an average annual total return of 5.5%.
During the same period, the total market, reflected by the S&P 500, delivered a cumulative total return of 70% and an average annual total return of 3.8%.
Over time, the dividends definitely make a difference.
So if you want to add Utility Dividends to your portfolio, an easy way is to look at an ETF like the Select Sector SPDR-Utilities (XLU). Right now it yields 3.5% and over the last 10 years has almost doubled in price!
You can also go the individual route, but I’ve got to warn you, it’s a treacherous road…
Take for example three giants of America’s utility industry: Duke Energy Corporation (DUK), Pacific Gas & Electric (PCG), and Exelon (EXC).
Duke Energy Corporation just started paying dividends seven years ago. It is headquartered in Charlotte, North Carolina and serves 7.2 million customers in six states.
PG&E Corporation does not have a track record of growing its dividend payments. It is headquartered in San Francisco and serves 15 million customers.
Exelon Corporation has been paying dividends for years, but payouts are BELOW where they were just 10 years ago. It is headquartered in Chicago, Illinois and serves seven million customers.
Not all utility stock investments are treasure troves!
If you’re looking for an easy way to add solid returns to your portfolio, you need to consider adding Utility stocks that pay a nice dividend. Solid dividend yields in the Utility industry have attracted a lot of investor attention… and it’s a great place to invest. Just pick your investment wisely.
Category: Dividend Stocks
