GET A QUOTE: Markets chart
Consider utility stocks to energize your portfolio
Updated  | Comment  | Recommend E-mail | Print |
Duke Energy linesmen work on power lines in Charlotte
By Chuck Burton, AP
Duke Energy linesmen work on power lines in Charlotte
Top-performing utilities funds the past five years:
Total return1
Fund, ticker
5 years
MFS Utilities A, MMUFX
FBR Gas Index, GASFX
Gabelli Utilities, GABUX
Fidelity Adv Util A, FUGAX
Franklin Utilities A, FKUTX
Average utilities fund
1 = Dividends, gains reinvested through Wednesday; 2 = 12-month yield. Source: Lipper
Most investors would like a 5% yield with no risk. Many people would also like a cat that sheds gold dust, too.

Unfortunately, we can't always get what we like, and a 5% risk-free yield is in the same category as weight-loss plans based on fried Twinkies. If you're willing to take some risk, however, you can get a yield of 4% to 5% from utility stocks.

Utilities aren't just electric power companies. The category also includes water and telephone companies.

Unless your local utility discovers a way to harness nuclear fusion or your water company finds a cheaper substitute for water, you're not likely to get rapid earnings growth from a utility. They're pretty sedate operations.

Furthermore, public utilities are closely regulated, which means that their earnings are fairly predictable. Because they won't entice investors with their red-hot earnings, they often pay above-average dividends. The Standard & Poor's utility index yields 4.31%, vs. 1.96% for the S&P 500-stock index. S&P's telecom index yields 5.42%.

Those above-average yields pay off over time. The Dow Jones utility average has gained 46% the past decade, vs. 29% for the Dow Jones industrial average, with dividends reinvested. Reinvesting dividends is also a good way to build a retirement portfolio. For example, suppose you had bought 1,000 shares of PG&E, a large electric utility, 10 years ago. Cost: $28,060.

By now, you'd have 1,057 shares worth about $49,350, assuming you reinvested dividends. If PG&E keeps its dividend at its current rate, you'll collect about $1,900 in dividends, or about 14% on your original investment.

The problem with hunting for dividend-paying stocks now is that you're not the only investor seeking yield. Why dividend plays are so popular:

•Few alternatives. If you buy a 10-year Treasury note now, you'll get 2.51%. Invest in a money market fund, and you'll get an average 0.03%.

•Lots of Boomers. The 79 million Baby Boomers, those born in 1946 through 1964, are lurching into retirement age. Retirees love high-yielding investments — such as utilities, for example.

So are utilities overvalued? Measured by price to earnings, utilities are fairly valued, says Maura Shaughnessy, manager of MFS Utilities fund. If you look at utilities vs. the 10-year Treasury note, however, they're "incredibly cheap," she says. If you're considering individual utility stocks, look for:

•Reasonable dividend yields. A stock doesn't have a 10% dividend yield because management are swell folks who like to dole out money. The dividend yield is the payout divided by the price, and a high yield typically means that the price has fallen on concerns the company will cut the dividend.

If you're interested in a high-yielding utility stock, you have to figure out the cash flow that supports the dividend payout. "It's an involved process," says Bobby Edemeka, manager of Prudential Jennison Utility fund.

•Recent dividend increases. Wall Street hates companies that cut dividends, because it's a sign of weakness. When a company raises its dividend, it's signaling it is strong enough to keep that level.

Three large U.S. electric utilities that have increased their dividends in the past 12 months:

•PPL Corp. (PPL); current yield is 5.12%.

Consolidated Edison(ED); 4.90%.

•Southern Co. (SO); 4.82%.

Several exchange traded funds offer a slice of a diversified utilities portfolio at low cost. Utilities Select Sector SPDR (XLU) currently yields 4.04% and has a 0.22% expense ratio. Vanguard Utilities ETF (VPU) has a 0.25% expense ratio and yields 3.68%.

Most actively managed utility funds let managers reach abroad for stocks, and to buy water, telecom and energy stocks, too. MFS' Shaughnessy, for example, likes National Grid (NGG), an international electricity and gas company that yields 7.7%.

No stock is riskless, and Prudential's Edemeka notes that many utilities could face increased regulatory pressure in coming years. And rising rates typically hurt utilities. But if you're looking for decent yields — and can take the risks — then utilities are an entirely reasonable place to look.


E-mail | Print |