Intricacies of the Utilities Sector

Investing in the utilities sector can provide you with several benefits. However, in order to benefit from this type of investment, you need to understand the intricacies of the sector. Here are a few things to consider about investing in the utilities sector.

Stock Value

In the past, utility stocks were typically reserved for investors that were very conservative. These investors did not want to invest in risky stocks and preferred the low risk that comes with investing in utilities. However, over the last few years, many utility companies have performed very well. Therefore, stock values have continued to increase in the utility sector over the years.

Dividends

One of the main reasons that people like to invest in utility stocks is the dividends that they provide. Utility companies tend to offer some of the best dividends around. Typically, everyone finds a way to pay their utility bills. Therefore, utility companies can count on a certain amount of income coming in on a regular basis. They will always have a certain amount of profit to distribute to their shareholders.

Safety

The government allows utility companies to have a local monopoly because of the difficulty of creating infrastructure. Therefore, as an investor, you know that you will not have to worry about other companies coming in and taking over the market. Investing in the utility sector is one of the safest forms of investment because utilities are regarded and treated as necessities.

Sensitivity to Interest Rates

Although utility stocks are considered very safe, they are sensitive to changes in interest rates. Whenever interest rates in the market increase, the value of utility stocks tend to go down. Since they are a form of passive investment, many investors will sell these stocks and invest their money in bonds that pay a higher rate of return. If you invested in utility stocks because of the regular dividend payments, you could potentially do better with a bond when interest rates go up. This means that you need to pay attention to interest rate changes if you are planning on investing in utility stocks.

Passing on Costs

As an investor in utility stocks, you need to understand that utility companies often have trouble passing on increases to customers. Utility companies are subject to price regulations and have maximums that they can charge to the public. However, sometimes utility companies are faced with cost increases. Whenever their costs increase, they have to eventually pass this on to their customers. However, during this transition phase, they could be operating at a level that is very close to cost. During this period, there will not be much profit to go around for the shareholders. This means that during these times, you will not be receiving a significant dividend, if any at all.

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