How to Invest in Utilities
Utility stocks are attractive to many investors because of their reputation for conservative growth. They provide us with basic needs like water, electricity, natural gas, and sewer services, and because they're considered a public service, government regulators have strong oversight of their business practices.
Yet the sector has changed dramatically over time. While some utility companies are still subject to extensive regulation that limits their expansion but guarantees modest profitability and reliable dividend payments, others occupy highly competitive niches where the risks and potential rewards are much higher. To invest successfully in utilities, you'll first want to answer these three questions:
Historically, most utilities fell into the category of regulated utilities. These companies were given monopolies over a particular region without facing antitrust scrutiny, but state governments retained the right to approve or deny proposed rate changes for each utility's customers. The general target setting rates is to give regulated utilities enough money to cover their operational and maintenance needs, along with a modest profit for its shareholders and other investors. Companies in this category tend to have stable earnings that grow at a steady but relatively slow rate. Their combination of slow growth and high levels of debt to finance capital investment make regulated utility stocks sensitive to interest rate movements, and they therefore tend to act more like bond investments.
Source: Fool.com
