Looking for a defensive investment with low volatility?
Utility stocks could be right for you. In this lesson, we’ll explain what utility stocks are, their typical characteristics, and where to go in order to invest your money. We’ve also prepared a list of utilities stocks you can consider for potential buys.
What are utilities stocks?
Utilities stocks are stocks of companies that provide services such as water, electricity, and natural gas. These companies are heavily regulated by government agencies and are an essential part of modern society.
Why do investors look for utilities stocks?
Utilities stocks tend to be relatively stable investments, not moving too sharply in either direction. This means that investors are generally looking for solid companies that will grow steadily over time. Given that utilities stocks usually divert some of their profits into dividends, these stocks can be a good stabiliser as part of a broader portfolio of stocks.
What are the defining characteristics of utilities stocks?
1) They’re steady
Utilities stocks don’t swing wildly based on flashy news events. Instead, they rely on recurring revenue streams that see little fluctuation.
2) They rarely innovate
Unlike technology stocks and healthcare stocks which parlay breakthrough new products into big gains, utility stocks simply sign up businesses and households for their services, without obsessing over new ideas.
3) Their earnings growth doesn’t impress
Rapid earnings growth and accelerating earnings growth are the hallmarks of some of the biggest stock market winners. Utilities stocks almost never deliver that kind of fundamental strength, and are best seen as a secure long term option.
4) They usually issue dividends
With such modest growth, utilities stocks need a hook to attract investor attention. They deliver this in the form of dividends. It’s not uncommon for dividend stocks to produce dividend yields of 3%, 4%, even 5% or more. That lets investors benefit from steady, quarterly income streams, in addition to the possibility of capital gains if they sell at a higher level than their purchase price.
Here are some examples
If you’re considering investing in utilities stocks, then these four companies are some of the biggest and best around.
1) NRG Energy (NRG)
The electricity generation company and service provider NRG has racked up strong gains in recent months, soaring more than 60% from its March 2020 low to its level in early June. The stock sports a healthy 3.3% dividend yield, with a tiny price-to-earnings ratio of just 2.3-to-1.
2) Sempra Energy (SRE)
SRE is a provider of electricity and natural gas services through multiple subsidiary companies, and has also gained ground since the stock market bottomed in March 2020, climbing 45% as of early June.
3) NextEra Energy (NEE)
A rare exception among utilities stocks, NextEra’s stock has racked up big gains over the past few years. Its stock price has more than doubled in price from year-end 2016 to an all-time high in February 2020. After a brief pullback in early spring, NextEra was back to within 7% of that peak as of early June.
4) National Grid (NGG)
The UK-based electricity and gas utility company has been a laggard in terms of price gains when compared to faster-moving industry peers. But National Grid makes up for that slower movement with a hefty 5.2% dividend yield.
How do I find utilities stocks?
You can check out investment websites such as Yahoo Finance and MarketWatch to find screening tools for the best utilities stocks, based on parameters such as price-to-earnings ratio and dividend yield. But you don’t need to go anywhere as you can also find some of the best utilities stocks right here on this site, thanks to our monthly lists of utilities stocks on the rise.
Visit this guide for more information on how to find utilities stocks >
Now that you have a better understanding of utilities stocks, click here to check out our next lesson on consumer stocks.