Power Up With Utility Stocks

By Investopedia Staff | May 09, 2011 AAA

Although the markets have rallied pretty strongly since the bottom of the global financial crisis, the recent political instability in the Middle East and the disaster in Japan have taken some of the wind out of bull market. Renewed issues from the Eurozone's debt problems, along with domestic consumer confidence issues have many investors wanting to dial down their risk profiles and look for a hedge. One sector is still trading at bargain levels, offers big dividends and could be a perfect place to hide out in any upcoming storm.

TUTORIAL: Major Investment Industries

Powering a Portfolio
The utility sector might offer the right combination of safety and dividends that investors are looking for to get them through the current turmoil. Offering a combination of benefits that could power portfolios, the sector has received a great deal of renewed interest over the few weeks. It's easy to see why. Even in times of duress, people need to heat and cool their homes. They need the water and electricity flowing. Utilities' stable cash flows and recession resistant nature makes them ideal candidates for investing in uncertain times. In many of their operating areas, utilities are usually government endorsed monopolies. These companies control the whole chain of production and distribution.

Their predictable and steady cash flows allow utilities to obtaining financing easier and therefore they are unlikely to experience financial issues when the economy is performing poorly. Generally speaking, dividend reductions in the sector are rare. Many utility stocks boast yields of 4% or more, besting the S&P 500's Index (NYSE:IVV) yield of 1.67%. The utilities sector is benefiting from overall rising energy consumption and any hint of a stronger economy. In addition, the sector is seeing added interest from retiring baby boomers as they make the transition to fixed-income investments.

Finally, from a stock metric point of view, utilities are one of the few sectors that have not experienced a huge run-up in prices. As the Federal Reserve unveiled its QE2 plan, many investors have migrated to riskier assets and unexciting utility stocks have fallen behind. The Dow Jones Utility Average is still about 140 points below its 2008 peaks and the broad-based Utilities Select Sector SPDR (NYSE:XLU) has only returned about 1% so far in 2011.

A Water, Electricity and Gas Portfolio
Funds like the PowerShares Dynamic Utilities (NYSE:PUI) or the iShares S&P Global Utilities (NYSE:JXI) make ideal choices for gaining broad exposure to the sector. However, given the choices available in the sector, investors can find bigger dividend yields and more growth in individual stocks. Here are a few picks.

A recent bill to lift a moratorium on the construction of new coal-fired power plants in Minnesota should benefit utility ALLETE (NYSE:ALE). The company currently operates several coal based plants in the state. In addition, the company has been making strides in renewable energy sources. ALLETE recently purchased a high voltage DC transmission line that runs from wind plentiful North Dakota to Minnesota. This allows the company to bring wind capacity online for customers. Shares of ALE yield 4.7%.

In 2010, natural gas consumption in the U.S. was 24,134 Billion CM. This was an increase of 5.7% compared to a year ago. Natural gas utility AGL Resources (NYSE:AGL) is prepared to take advantage of that continued trend with operations in the growing regions of the South, such as Virginia, Florida and Georgia. The company is set to merge with Nicor (NYSE:GAS) and currently trades at a forward P/E of 12 and yields 4.6%.

Providing dividend increases for the last 19 years, Aqua America (NYSE:WTR) allows investors to tap into the highly regulated water utility sector. Shares of WTR currently yield 2.7%. Similarly, competitors American Water Works (NYSE:AWK) and SJW (NYSE:SJW) both yield around 3% and offer water exposure to California.

Bottom Line
With the market once again starting to the digest the variety of issues plaguing the global economy, many investors are looking for a hedge. The utility sector offers stable dividends and predictable cash flows for portfolios. In addition, the sector is one of the few bargains left in the market. Funds like the Rydex S&P Equal Weight Utilities (NYSE:RYU) make it easy to add the sectors big dividends to a portfolio. (Even in times of economic turmoil, utilities can be a good investment. Check out Trust In Utilities.)

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