Utilities versus broader equities
Utilities are generally considered bond proxies because of their regular and stable dividends. Their stable-growing, highly regulated business models facilitate smooth earnings growth and allow them to distribute regular dividends. Though electric sales have shown flattish growth in the last few years, US utilities have managed to distribute stable or increasing dividends. US utilities topped the charts this year and outperformed all other sectors.
Utility stocks or ETFs?
However, US utilities have come down by nearly 10% in the last couple of months, which has made them relatively fairly valued. Utilities are relatively less risky stocks in the equity universe. Investors can further minimize the risks by investing in the bunch of stocks like ETFs or mutual funds. We’ll discuss top-performing utility ETFs in the series.
The Utilities Select Sector SPDR Fund (XLU) is the largest utility ETF with nearly $8 billion in assets. Another utility ETF that we’ll discuss is the Vanguard Utilities Fund (VPU). Both have delivered double-digit returns in the last one year.
One may argue that utility ETFs offer much lower yields than some well-regarded utilities. For instance, Duke Energy (DUK) and Southern Company (SO) yield much higher in the range near 4.4% while utility ETF VPU yields somewhere around 3.1%. But, investing in utility ETFs significantly lowers the risk compared to investing in individual stocks. To illustrate this point, the largest nuclear generator Exelon (EXC), one of the top stocks in almost all the utility ETFs, nearly halved its dividends in 2Q13.