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Utilities Offer Stability No Matter
What the Market Conditions
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Thanks in part to their often
government-mandated monopoly status, utilities are generally
considered a staid and buttoned-down class of investments. But
this is a positive from an income perspective. Utilities tend to
be some of the most solid and predictable companies on the
market. With stable revenues and a track record of returning the
bulk of their income back to shareholders, utility companies
have been one of the greatest distributors of dividends for many
years.
Of course, as in most industries, there are exceptions to the
rule. For example, the debacle surrounding Enron not only
temporarily tarnished the reputation of utilities, but of the
markets in general. However, excluding this rare and unfortunate
example of poor corporate governance, utility stocks have
anchored the portfolios of many retirees and conservative
investors for decades.
Government Regulation
Without a doubt, our nation could not function without the
backbone services provided by the utility industry. Few
appreciate these unsung businesses until
they are forced to go without running water, natural gas, or
electricity for a few days. With few exceptions, every consumer
and business in the country relies on these basic necessities,
and without them our economy would grind to a halt.
Because it is often far more efficient to have a single provider
for these basic necessities, most utilities are set up as
monopolies in their respective markets. To keep these local
monopolies from abusing their power, regulation is usually
imposed at both the state and federal levels. In most cases, the
government sets the maximum rates that utility companies can
charge their customers. These rates are designed to enable the
utilities to earn a fair rate of return on their assets without
allowing them to take advantage of their monopoly status.
So, what is the end result of a government-sanctioned monopoly
coupled with guaranteed demand? In most cases, this advantageous
position results in a cash-generating machine protected by
extremely high barriers to entry. Such companies are often
highly defensive in nature, with slow, steady growth rates and
generous dividend payouts. For example, the average utility
stock in the Philadelphia Utility Index offers a yield of around
3-4%, or about double what is found on the S&P 500.
But not all utilities are slow-growing behemoths. In fact, those
that operate in countries like China and India are benefiting
from electricity consumption that is growing at more than twice
the rate of that in the U.S. With this in mind, utilities in
such markets can offer the best of both worlds: steady income
and capital gains potential. Not surprisingly, these securities
are often prized by investors, as they offer downside protection
as well as market-beating total returns.
Shelter During a Market Storm
It is impossible to predict exactly how the global markets will
perform over the coming years. However, after several
consecutive years of gains, it is likely that we could be headed
for a rocky period of flat, or even negative overall returns.
This cyclical pattern has played out time and time again over
the years.
Although most investors choose utilities for their stability and
their rich dividend yields, the industry can also provide some
impressive upside potential, particularly when the broader
markets are falling. When the market struggles, investors often
seek shelter by rotating their money into stable utility
providers. This is one of the reasons why the utility sector has
often outperformed the S&P 500 during down markets.
If a recession rears its ugly head or consumer spending slows,
then discretionary purchases like high-priced vacations or
big-ticket electronic products are likely to see declines.
However, money will still flow into those products and services
that consumers need, such as electricity and natural gas.
However, that is not to say that utilities stocks are left
behind when the market is climbing. In fact, the Dow Jones
Utilities Index, which tracks a broad basket of gas, water,
power, and other utility providers, has delivered an impressive
average annualized total return of about +18% over the past five
years, versus roughly +13% for the S&P 500. And as mentioned
above, foreign utilities offer even more growth potential.
Putting it all Together
Many utilities offer hefty dividend yields, attractive
fundamentals, and promising long-term growth prospects. As such,
trying to narrow the huge pool of potential candidates down to
just a select few investment ideas can be both difficult and
time-consuming. Fortunately, we have already devoted many hours
to just this task.
After conducting a comprehensive review and analysis of many of
the world's leading utilities and evaluating each of them on a
number of quantitative and qualitative factors, we arrived at a
select group of four finalists. This group includes two
well-known homegrown companies, as well as two foreign-based
utilities providers that operate in some of the world's most
promising regions. We'll dedicate the remainder of today's
report to in-depth profiles of each of these standouts...
Important
Note:
This article
is an excerpt from StreetAuthority's popular income investing
report, "Best Utilities You Can Buy Now." In the remainder of
the report,
High-Yield Investing editor Carla Pasternak profiles
four standout utilities that are
poised to help your portfolio in an
up or down market. However, to read
these profiles, you must be a
High-Yield Investing subscriber.
To learn more about this income investing newsletter, and to
access the rest of this report, please
visit this link. |
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How to Own Gold
For $329 an Ounce
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Get the full story here... |
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