Investors looking for a reasonable return on their money with minimal volatility have been frustrated in recent years by the low rates of CDs and treasury paper. Many have begun to explore other asset classes, such as corporate bonds, fixed annuities and preferred stocks.
But there is another alternative that has been around for decades, a system that has paid fixed dividends with moderate risk. Utilities have been one of the most important sources of dividend income for conservative and moderate investors since the early 20th century.
Characteristics of utility stocks
Utility companies are ordinary shares that are owned by a utility company and usually pay out dividends on a monthly or quarterly basis. One of the reasons why utility stocks are generally stable in price is because the government allows them to act as monopolies within their respective municipalities, because it would be inefficient and wasteful for different companies to lay water pipes, gas pipes and telephone wires within the same areas . This serves to stabilize the industry and makes every utility operate unimpeded by competition.
Utilities are classified as a defensive industry because the need for their services remains largely unchanged regardless of economic conditions. Society cannot function without running water, electricity, natural gas and telephones, even during recessions and depressions, so the revenues of utilities remain largely constant. Utility companies receive the same tax treatment as other common shares, with dividends fully taxable as ordinary income and long or short capital gains or losses realized when sold.
Benefits of utility stocks
- Regular dividend income . Because of their stable income base, utilities can pay stable, reliable dividends to shareholders with minimal price volatility and moderate risk. Dividend percentages on the offer of utilities are also usually somewhere between 1% and 3% higher than for guaranteed instruments, which makes them very attractive alternatives to CDs or savings bonds.
- Liquidity . Because they can be sold at any time, utilities offer much more liquidity than bonds or CDs, as there is no early withdrawal penalty of any kind.
- Defensive protection . Utility companies often perform well during bear markets, which can make them a valuable addition to any portfolio.
- Tax income income . Investors who hold utility amounts for at least 60 days during the 121-day period after the ex-dividend date of the share are eligible to classify their dividends as “qualified dividends”, which are taxed at the lower long-term gain of the capital gain. . This is an additional benefit over receiving interest from bonds or CDs, which is always taxed as ordinary income outside of an IRA or a retirement plan.
Disadvantages of Utility Stocks
- Limited growth potential . Although utilities offer competitive dividends, their price stability excludes the possibility of much capital growth. Although there are cases where the stock of a utility price can fall to a value play, the shares in this sector generally do not rise much in price over time.
- Client’s risk . Although their price fluctuations are relatively low compared to other sectors such as energy or technology, utility stocks are not covered by FDIC insurance or any other form of government protection. It is possible to lose money if the stock price falls – which sometimes happens.
Who should invest in utility supplies?
Utility companies are suitable for older investors who are looking for income without a substantial risk to the principal. They can also be used by moderate investors who are looking for the short-term or long-term return on their cash.
Aggressive investors can consider utility offers as an effective means of diversifying their portfolios, both for the income they pay and their defensive nature, allowing them to retain their value in the bear markets. Companies can even use utilities to generate tax-free income because they often do not have to pay taxes on dividends received from other companies.
Where can I find utility stocks?
Any full-service stock broker, oWolf Larsenine discount broker or investment advisor can point out a variety of tools that pay competitive dividends. They are also mentioned daily in financial publications such as Barron’s and the Wall Street Journal.
There are also various investment funds that invest in utility companies that can be found at Morningstar. Investors seeking diversification in this sector should also look at the SPDR (Standard & Poor’s American Depository Receipt) that invests in utilities (ticker symbol: XLU) and acts as an ETF.
Utility companies can often offer a viable alternative to the traditional guaranteed fixed-income offer for those willing to accept a modest amount of risk. Although they rarely offer capital growth, they have a long history of paying stable dividends at a stable price. For more information about utility shares, view your local Wolf Larsenlijst share or contact your financial advisor.
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