Create Your Own Growing Utility Fund Offering Over 4.5%

Includes: EDE, ETR, HE, PPL, SO, UTL, WR
by: Henry Nyce

Last month I suggested a plan to create a mutual fund of regional banks. This month I want to offer a plan to create a mutual fund of electric utilities. The reason to purchase mutual funds is to reduce the risk of putting one's eggs in one basket. Purchasing one fund or ETF immediately offers a diversified investment. Many funds and ETFs are designed to cover a particular industry in order to offer investors the opportunity to purchase a basket of stocks in a specific industry. The reason to purchase an electric utility fund is to have a reliable source of dividends or income coming quarter after quarter with some growth to keep up with inflation.

Building one's own fund allows one to select the companies in the fund. It also avoids mutual fund expenses that can run as high as 5% of one's investment. To create this fund, let's assume one is willing to put $50,000.00 into electric utilities as part of one's total portfolio. Using that assumption there are several questions one must be willing to answer:

  • How many companies and how many shares of each should be in the fund?
  • What kind of geographical mix should be in the fund?
  • Which companies are offering a reasonable dividend and growing their revenues and profits?

To help answer these questions, I ran a screen on electric utilities that had the following criteria: (using the TD Ameritrade Screener)

  • Dividend yield 4.5% or greater
  • Revenue growth over last 5 years

This screen offered 34 results. 20 of the results were preferred shares and so I immediately eliminated them. I eliminated the preferred shares because there is no possibility of growth. Preferred shares, when called, are redeemed at the issue price, which could be lower than one's purchase price and the dividend remains constant and never increases. Therefore there is no protection or hedge against inflation. That left 14 companies to consider. Five of the companies were foreign, so I eliminated them also. That left nine companies to consider. See the list below:


The table above (all figures taken from TD Ameritrade) indicated that some of the companies had negative income growth rates over the past five years. Any company with a negative income growth rate that was 5% or greater was immediately dropped from consideration. That left EDE, ETR, HE, PPL, UTL and BIP. Since BIP is clearly involved in many other ventures other than electricity, it was dropped from the list as well.

The five utilities remaining offers some scattered geographical distribution, however the West and Southeast are missing. In order to include the West and Southeast, I chose to add WR and SO to the list. (WR and SO did not make the first list because their dividend return was less than 4.5%.) The chart below shows the seven stocks I chose to include in this utility fund:

If one were to purchase 200 shares of each company, the net result is shown below: (prices as of 3/20/2013)

There you have it. A $50,000.00 fund of electric utilities offering a 4.7% return with five of the seven companies having shown income growth over the past five years. This group of companies is spread throughout the U.S. offering geographic diversification as well. One could add worldwide diversification by adding DUK to the fund.


This article offers a proposal for creating one's own fund of electric utilities assuming one desires to invest $50,000.00 in that industry. One could reduce the investment to $25,000.00 by purchasing only 100 shares of each equity. A retired person looking for a steady and reliable source of income could create a utility fund similar to the one offered above for part of one's total portfolio. Since several of these companies are near their 52-week highs, it would be wise to build the fund over time to take advantage of price movements to lower one's net cost of ownership of the fund.

Disclosure: I am long PPL, POM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I will likely write puts on the companies listed in this article to begin building this fund in my own portfolio.