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Should You Invest In Utility Stocks?

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Utility stocks are typically stable, low-risk investments that generate consistently reliable earnings. American Water Works, for example, is the biggest publicly traded water and wastewater utility in the United States. Its earnings per share are set to increase at a compound annual rate of 7%-10% between 2021 and 2025 — making it one of the fastest-growing utilities in the country, the Motley Fool reports. By weighing the pros and cons of utility stocks and determining how much it’s right for you to invest, you can make the most of this popular investment method.  

Advantages of investing in utility stocks

The biggest advantage of investing in utility stock is they typically pay high dividends. As utility companies belong to a tightly-regulated industry, associated revenue is generally very predictable with less exposure to market volatility. So, as a result, strong dividends can usually be expected. In fact, utilities companies often offer dividend payout ratios surpassing 50%. And, as a consequence of high dividends, you’ll also benefit from a lower tax rate. Specifically, if you hold a utility stock for a minimum of 60 days after its ex-dividend date, any dividends earned will be taxed at a lower rate.  

Additionally, investing in utility stock also comes with the strong likelihood you’ll experience gains (particularly in contrast to more volatile sectors). We all need to meet our basic needs with water, electricity, and natural gas — regardless of the economic conditions. So, utility companies have created a strong, reliable, and continually-expanding infrastructure, which in turn helps increase profits. The essential nature of utility companies also means utility stocks are typically perceived as a defensive investment — meaning they fare better in market downturns. Utilities stocks also tend to stand strong during economic recessions when markets are usually in bad shape.  

Disadvantages of utilities stocks 

Despite their impressive advantages, utility stocks do nevertheless also come with their downsides. In particular, investors should expect value growth to be slow over the long term; they’re not a wise choice for someone seeking rapid growth opportunities. Additionally, despite the stable, long-term growth offered, utility stocks can also fall prey to share price drops. For example, market down turns, bad decision making at management level, and disadvantageous regulations can cause share prices to fall.  

How much should I invest in utility stocks?

Before investing in utility stocks, it’s important to read up on the latest stock market news and analysis, so you can make the best decisions for your financial situation. Utility Forecaster, for example, is a research service from Investing Daily designed to help you out in this regard. It aims to inform users of the most promising opportunities in utility stocks across a number of different sectors, new stock recommendations each month, and less-risky individual utility sectors. Moreover, when it comes to deciding how much you should invest in utility stocks, it’s important to take several factors into account. First, consider your unique financial goals. If you want to generate stable, long-term growth, utility stocks should comprise a decent chunk of your stock allocation. Alternately, if you want maximum profit in the immediate, you won’t want much of your portfolio to comprise utilities stocks. 

It’s also important to consider your desired portfolio ratio of stocks and bonds. Bonds are typically low-risk and offer modest growth while stocks are more risky with a higher growth potential. So, if you desire a lower-risk portfolio, you’ll want a higher ratio of bonds, whereas a higher-risk portfolio requires a lower ratio of bonds. And, when you know how much of your portfolio you want to be invested in bonds, you’ll then know how much you have leftover to invest in stocks and, specifically, utility stocks. You can decide your portfolio ratio of stocks to bonds by taking your age into account. For example, a thirty-five year old may choose to make bonds 35% of their entire portfolio. If, on the other hand, you’re willing to take on greater risk in the hopes of bigger profits, you can lower bond allocation by 10%. And if you want less risk? Increase your bond allocation by at least 20%. 

Finally, the 5% rule can also prove useful when starting to invest in utilities. The rule essentially advises you to avoid investing over 5% of your portfolio in any one stock. In turn, this ultimately helps ensure a diverse portfolio, which limits risk and minimizes your exposure to significant losses. 

Utility stocks are a popular investment with those seeking consistent earnings and dividends over the long term. By taking time to weigh up the pros and cons of utility stock investing and deciding on how much it’s right for you to invest, you’ll be able to successfully grow your wealth with this lucrative method of investing. 

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