Utilities Sector

One of the ten Global Industry Classification Standard (GICS) economic sectors, the utilities sector includes stocks for services such as gas and power. Typical companies in the utilities sector include electric, gas, and water utility providers. Although often referred to as utilities by consumers, telephone, wireless, cable, and satellite services fall under the telecommunications sector.

One of the ten Global Industry Classification Standard (GICS) economic sectors, the utilities sector includes stocks for services such as gas and power. Typical companies in the utilities sector include electric, gas, and water utility providers. Although often referred to as utilities by consumers, telephone, wireless, cable, and satellite services fall under the telecommunications sector.

Because utilities require significant infrastructure, these companies tend to carry enormous loads of debt. With so much debt, utilities are sensitive to changes in the interest rate, because debt payments go up or down in relation to those rates. Thus, the utilities sector performs best when interest rates are falling or remain low, making them very popular during economic contraction periods.

Understanding the Utilities Sector

Although essentially a necessity, utilities perform differently than consumer staples. Many financial experts consider utility sector stocks the ultimate investment for those who are adverse to risk. While they do not tend to experience wild swings in value, utility sector stocks can provide steady growth and income, even during dangerous economic times. In fact, utilities sector stocks are usually the first to go up during economic recessions.

Because of their stable income base, companies in the utilities sector are usually able to pay steady, reliable dividends to their shareholders. Dividend yields historically fall somewhere between one and three percent higher than for guaranteed instruments, making them attractive alternative to other low-risk investments like certificates of deposit (CDs) or savings bonds. These stocks are often considered “defensive,” meaning investors can rely upon them to do well during bad markets. That makes them an excellent addition to most well diversified portfolios.

On the other hand, utilities sector stocks usually suffer from limited growth potential. Although they provide steady income, that stability in price and revenues precludes much capital growth. Moreover, although utility stocks are less volatile than stocks in the energy or technology sectors, FDIC insurance, or any other form of governmental protection, does not cover utility company stocks. Thus, as a low-risk investment, it is still slightly more risky to invest in utilities sector stocks than to simply squirrel money away in a bank or a CD because it is possible to lose money if the stock price declines and it does happen from time to time.

Investing in the Utilities Sector

Any full-service stockbroker, online discount broker, or investment adviser can point an individual investor towards a variety of utility sector offerings that pay competitive dividends and have experienced a history of stability. There are also mutual funds and exchange-traded funds (ETFs) that invest in utilities. Utility sector stocks often provide investors with a viable alternative to traditional low-risk, fixed-income offerings. While they do have a small amount of risk, these stocks are not subject to concepts like the negative yield of some bonds during periods of high demand—normally during economic contractions. For more information on investing in utility sector stocks or funds, check with brokers, financial advisers, or perform adequate research to determine the highest yielding but most stable companies.