Energy utilities are providers of a growing necessity, and usually at government-regulated prices and restricted competition within the United States. Because of utility distribution regulations, energy utility equities are considered generally reliable and predicable businesses, with stable and growing payouts, and the demand for energy is largely expected to increase as the population and its use of technology grows.
The regulated nature of energy utilities makes their dividends reasonably secure, and also designates the equities as classic "widow and orphan" stocks. Their relative security means that the dividends and equity are unlikely to grow at a rapid pace, though utilities can outperform the broader market, and did in 2011.
Nonetheless, many have stalled within 2012, and may now be underperforming the broader market. Some of this underperformance may be due to investors fearing that bond yields may soon rise, and that energy utilities may depreciate due to their common use as a bond and/or other fixed income investment.
Below are performance rates for six large cap (over $10 billion) utilities within the S&P 500 and with yields above 4.5 percent: American Electric Power (AEP), Duke Energy (DUK), Entergy Corp. (ETR), Excelon Corp. (EXC) FirstEnergy Corp. (FE), and PPL Corp. (PPL). I included their one-month, 2012-to-date and six-month equity performance rates (not including dividends paid). I have also provided their current yields.
And below is a 2012-to-date performance comparison chart for these six equities:
In 2011, most utilities experienced strong performance, though there was also a good deal of weakness among the group at the end of 2011 and so far into 2012. This likely indicates that these utilities were overbought and/or that end of the year selling hit the sector, as well as possible rotation into higher growth sectors that are less likely to suffer significant declines if Treasury yields spike up.
So far in 2012, the above-listed equities are down an average of 4.95 percent, moving down against the direction of the broader market, as defined by the S&P 500, which is up about 10.8 percent so far this year. This rotation appears somewhat normal and expected, but it should also be expected that some dividend seeking investors may eventually return to well-priced utilities, some of which now offer a yield at or above five percent.
Investors looking to double their money in the next year or two are unlikely to look at utilities. Utilities are also generally far less volatile than the broader market, and the demand for utilities is only expected to increases over time, as technology advances into new realms and the population continues to grow.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.