Advantages of Investing in Utility ETFs

Utilities have a history of good dividend returns and safety. It is not true, as some people claim, that utilities are immune from downturns in a sinking market, but they are less likely to fall precipitously under adverse economic conditions.

Surprisingly, public utilities offer value, profit, and reliability when the market is at its worse. Roger Conrad’s Utility Forecaster of January, 2008 (www.utilityforecaster.com) presents an extensive menu of high-yield utilities. He says, in their favor: “Utility stocks haven’t gone straight to the moon in five years. But they’ve come pretty close: The index of 20 electric utilities traded on the Philadelphia Stock Exchange tripled from late-2002 lows and are 50 percent above their 2000 peak.” Many, in fact, are trading at their 52-week highs.

The following table illustrates the relative advantage of utilities, in contrast to other sectors of the market. The data are for the losses from October 9, 2007 to January 23, 2008 (Wall Street Journal, Jan 23, 2008). They are exemplary for sector performance under very adverse market conditions.

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In this example Utilities, overall, suffer the lowest loss during an economic downturn – less than five percent. Many individual utility stocks do better, and it is those that you should search for. One can cut the sector loss by about 50% by selecting stocks with the strongest fundamentals. In any case, the 4.5% loss for Utilities is less than the overall dividend yield. Thus, one can argue that there has been no loss for Utilities.

Direct Purchase [DP] and Automatic Reinvest [AR] Plans

Several utility companies have stock plans that allow investors to buy shares in reinvestment plans without brokerage fees. This is a neat aspect of the plans, as brokerage fees whittle down your profits. For example, if you purchase shares each month, and the brokerage commission is only $7.00 a purchase, you will be spending $84.00 a year on commissions alone.

This is money that won’t be earning you additional money through reinvestment. You can skip this expense by Direct Purchase [DP] of funds and Automatic Reinvestment [AR] of investment dollars, appreciation, and dividends. Reducing brokerage fees to zero in a dividend reinvestment system can make you thousands of dollars. You still have to do your own stock analyses, but you want to do that anyway.

Several of these DP and AR plans are listed in the following table. Check for current prices, yield, and total returns. They represent utilities with interests ranging from electricity, to nuclear power, and water. Most require $250 or sometimes $500 as an initial investment. Additional contributions can be made automatically through your personal or business bank account. Many more DP/AR utility stocks are available through Utility Forecaster, www.utilityforecaster.com (703.394.4931). A more diverse selection can be found at American Association of Individual Investors, www.aaii.com.

Making It Big with Utility ETFs

Fourteen ETF Utility Funds are listed in the following table. They share many of the conservative characteristics found with stock utility companies, but they have the added advantages of diverse holdings and relatively low risk. None of these, as far as I known, have DP/AR plans, but they often do generate dividends. You can construct a strong portfolio of utility ETFs and reinvest profits periodically in those that maximize your returns.

Several of these have demonstrated great returns: IDU 1yr = 28.25%; RYU YTD = 10.00%; PHO YTD = 16.73%; DBU YTD = 23.28%; UTH YTD = 9.91%; PRFU 1 yr = 11.53%; PBW 1 yr = 58.50%; XLU 1 yr = 19.86%; VPU YTD 10.14%; JXI 1 yr = 22.46%.

Advantages of Investing in Utility ETFs

Many of the utility ETFs are new to the market but should do well over the long-term. Certainly, they reflect the most prominent megatrends in history. The key ingredients in the recipe for profitable utility ETFs are that:

1. The holdings are well-known utility stocks that show long-term price stability and have a history of increasing yields.

2. Like utility stocks, utility ETFs show reduced volatility in tremulous markets. They rarely show knee-jerk reactions to market corrections.

3. Utility ETFs with diverse holdings spread the risk associated with financial allocations. Holdings have assets among electricity, natural gas, coal, solar and wind generation, biofuels, nuclear energy, and even water.

4. Utility ETFs can be selected to reflect foreign allocations and specified geopolitical regions.

5. Utilities are useful investment vehicles because the world cannot do without them. Over time the demand for utilities and what they can do increases. Utilities typically have good dividend payouts, thus compensating for temporary decreases in prices.

6. Last, there are links between increasing interest in clean energy and growth of utility funds. Current growth of clean energy ETFs (solar, wind, biofuels, water, nuclear, etc.) are likely to stabilize utility use and increase their efficiency. Companies that can’t make adjustments will become Darwinian history. Technical advances that favor clean energy will also favor the transition of traditional utility companies into key players in alternative energy sources, energy production and transmission, and in waste management. It is clearly a win-win synergy.

Comments

[granger]

Check out DNP, closed style, but has along track record, with a solid monthly dividend, I have held for many years, just letting the dividends reinvest and keep growing, love having this bbay in my portolfio, stable and smothes out overall volatility

worth a look

[Bradleto55]

Well, I'd buy the argument that utilities are safe if not for history. The DJ Utility Index peaked at an intra-month high reading of 418.25 in December of 2000, then fell to 162.52 as a intra-month low reading in October of 2002. That is a whopping 61% decline, not factoring in dividends which would have lessened the "damage" a bit. More recently in the current decline, the DJ Utility Index lost 14% from intra-period high to intra-period low readings. More losses could be on the way... Utility stocks are not safe haven in true bear markets; in the last one, they suffered tremendously.