The Fed's latest decision this week to again stand pat on whether to raise interest rates has at least some investors happy. Holders of utilities stocks are seeing their shares rise as expectations reset for continued low cost capital to this sector.
Anyone searching for income in this market has of course been frustrated by the low yields offered by government bonds, money market funds, and savings and time deposits. Yields for these securities remain close to zero percent on investment. Conservative investors dislike the risks generally posed by stocks and by long term bonds, which can be subject to volatility like we experienced in August.
Just staying in cash may be tempting, but is often unrealistic unless the investor opts in to draw down his or her balance over a period of years. There is a way, however, for conservative investors to put their money back to work.
Anyone who has lost patience with zero returns for yield may find an attractive alternative in shares of selected U.S. public utilities. Companies providing natural gas, electricity, and water to residential and commercial customers are supplying life's necessities. Utility companies can exhibit more consistent revenues and profits than do companies exposed to the wider swings of today's economic cycles. Most consumers will pay their utility bills before they use funds for other bill payments. Utilities can benefit as the population grows, as rate increases are imposed, and as service areas expand.
At present, dividends in the public utility market range from three to over five percent per year! The dividends, although never guaranteed, are usually consistent. In choosing among these stocks, investors should favor those companies that pay steady dividends or that increase dividends over time. In this way, long-term investors buy a hedge against future inflation.
Many utilities are currently reinventing themselves, in face of growing competition from homeowners investment into solar panels. For this reason, careful research can identify those companies that are actively seeking new business models for offering value to their customers.
A company that delivers an indispensible product, enjoys government mandated price increases, and is favored with near compulsory billings should merit an investor's attention. As a financial planner, I often work with my clients to diversify their income holdings to include utilities will for greater current income, opportunities for increasing income, and some appreciation.
People interested in this sector might review the white papers recently published by the major accounting firms with utilities practices. These include KPMG, Deloitte and PWC. The insights provided by these strategists are excellent. They have helped me discover some of the better opportunities for growth among utility stocks.
At McClurg Capital, we are registered investment advisors serving Bay Area investors for more than 25 years. All client assets are held in custody in a separate account in client names at the Pershing Division of the Bank of New York Mellon.
If you agree utilities would may fit into your investment strategy, give me a call. We can build a portfolio of individual utilities for you that will serve you well.
Kathleen Nemetz, MBA, CFP, CDFA