Investors looking for a value investment that typically provides steady income without high volatility might consider investing in utilities. Utility companies provide essential services that the public uses on a daily basis, such as water and electricity, making them generally very valuable and stable investments.
Investing in utilities is considered to be low risk compared to other different types of stocks, since utility companies are regulated entities with few competitors. Plus, their profits and expenditures are very predictable, so they tend to be stable investments.
Utilities are a constant in modern life—people always need them—so utility companies tend to ride out economic downturns without significant volatility, while providing higher dividends than other fixed income assets.
What are Utility Stocks?
The utilities sector includes electricity, gas, water, and waste services. Cable and telephone companies used to be placed in the utilities sector, but now they are within the communications sector due to shifts in technology and competition.
The utilities sector includes companies that generate power and alternative and renewable energy, as well as companies that transmit and distribute power to homes and businesses. Companies that provide natural gas generally buy it from oil and gas drilling companies and distribute it to customers. Water companies provide clean water to customers and collect and treat dirty water.
Since there will always be a consumer demand for basic utility services, the sector continues to invest in infrastructure, resulting in continuous growth.
There are government regulations protecting utility companies, making it difficult for competitors to enter the market. Regulations also control the prices that utility companies charge for goods and services, making their earnings predictable and creating even more stability in the market. It’s also extremely expensive to build the infrastructure needed to provide utilities. This allows utility companies to establish themselves in a region and grow steadily over time without significant volatility.
Who Should Invest in Utilities Stocks?
Utility stocks are generally considered to be income stocks rather than growth stocks, since they provide consistent dividends but don’t tend to significantly increase in value.
Some people might be tempted to think of utility stocks as similar to bonds, since they provide consistent income and tend to be stable and safe. But they are not the same. One difference is that the yields from utility stocks tend to be higher than those of bonds and other fixed income investments. These factors make them popular as a safe haven asset, and among retirees and conservative investors.
Ready to invest in utility stocks?
Consider doing it with SoFi Invest.
Choosing Utilities Stocks to Invest in
There are a number of ways to evaluate a stock in a utility company before buying it—here’s what investors might want to consider.
New Utility Companies and Emerging Markets
Since utility stocks have high dividends (making them popular monthly dividend stocks) and tend to be established companies, they don’t have the opportunity for significant growth. But some stocks in emerging markets or those of new utility companies can be an exception. Growth investors tend to gravitate towards these types of utility stocks, use utilities as a safe haven during market downturns, or as a way to diversify.
Companies with Moderate Dividend Payouts
Investors can look at a company’s dividend payout ratio to see how much of its profits it retains and how much it pays out to shareholders. If a company pays out less to shareholders, it may have more potential for growth since it keeps those revenues to invest back into the business and won’t need to borrow as much money.
Undervalued Utility Companies
Technical analysis can help both growth and value investors pick out which utility stocks might be undervalued and those which have the most potential for growth and income.
Utilities with Healthy Credit Ratings
Another tool investors can look at when choosing utility stocks is their credit rating. A higher credit rating means a company will be able to borrow more money, which is important for utility companies that need to continue investing in and maintaining infrastructure. However, too much debt isn’t a good sign, so investors should look at the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) and debt-to-total-capital ratios when comparing potential utility stock investments.
Other factors to consider when choosing utility stocks:
• The region in which the company operates
• The regulatory market in that region
• The utility the company provides and its business model
• The dividend rate
• The company’s financials
Investors who want to gain exposure to a broad cross section of the market rather than choosing individual stocks might choose to invest in utility ETFs and mutual funds.
Benefits of Investing in Utilities Stocks
There are several reasons investors choose to add utility stocks to their portfolio:
• They tend to pay out higher dividends than other fixed-income assets and stocks.
• They are considered safe and stable investments. There will always be a demand for utilities, investors tend to sell off higher-risk investments first, they are under government regulation, and they have few competitors.
• They tend to have high dividends and stability. Even though they don’t always see significant growth, their high dividends and low volatility make them a popular investment, so they do continue to grow over time.
• They can be a safe haven asset during economic downturns. Utilities provide essential services, making them a good way to diversify a portfolio.
• They have little competition. Government regulations create the opportunity for utility companies to essentially become monopolies within their operating region, reducing the ability for competitors to enter the market.
• Certain utility stocks may provide tax benefits. This can include lower capital gains rates for qualified dividends.
Downsides of Investing in Utilities
Although there are many reasons to invest in utilities, like any investment, they come with some downsides:
• They are riskier than bonds. Since they are still part of the stock market, their values do fluctuate along with market trends. Utility stocks lost about half of their value (not including dividends) in both of the major market downturns in the past decade.
• They don’t provide opportunity for significant short-term growth. Here, their stability can be seen as a negative.
• Rising interest rates can negatively affect utility stocks. That’s because utility companies tend to hold a lot of debt since their businesses require significant capital investment. As interest rates rise, companies have a higher debt burden. Also, when interest rates rise, stock prices tend to decrease, thereby decreasing their amount of equity funding and causing some investors to shift funds into other types of assets.
• Utility companies are affected by changes in government policy. Regulations can also make it challenging for companies to grow, since they can’t easily increase their prices.
• Not every utility company has high returns. The best choices for investors are the ones that show visible potential for both growth and high-yield dividends. Since utility infrastructure is expensive to build and maintain, companies need to show that they will be able to continue running and growing while still earning enough profit to pay out dividends.
Investing in utility stocks can be a good way to diversify a portfolio, by adding low-volatility assets that typically have high dividends. The public will always need utilities like water, gas, electric and renewable energy—and that allows utility companies to weather economic downturns relatively well.
For investors looking to build a portfolio, SoFi Invest® makes it easy to invest in utilities and other assets. Using the investing platform, you can research and track your favorite stocks, and buy and sell with just a few clicks. You can buy stocks and ETFs as well as buy and sell cryptocurrency and other assets. SoFi offers both active and automated investing, so you can hand-select each stock or choose from pre-selected groups of stocks.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A., or SoFi Lending Corp.
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.