A:

There several disadvantages associated with investing in the utility sector. Utility stock prices are unlikely to fluctuate, reducing the potential for capital gain. There is also the risk that the stocks may decline to the point that the investor suffers losses. Another downside of utility stocks is that they are not insured by the Federal Deposit Insurance Corporation (FDIC) or protected by the government in any way. This adds a greater risk for investors, who will have no recourse if a utility company goes bankrupt.

Though utility companies tend to offer high-yield dividends, this does not mean that they will not be reduced or even eliminated entirely. Several utility companies have reduced their dividends over the past few years. Utilities have fairly high standard deviation rates, with their average rate from 1927-2011 being 22.2%. In contrast, treasury security standard deviation rates ranged from 3.1-9.8% within the same time period. The average deviation rate for the stock market in its entirety was only 20.5%. Although considered by most to be defensive stocks, utilities have a track record of poor performance in bear markets, such as in years 2002 and 2008, when utility companies lost 23% and 29%, respectively.

A foreseeable risk to investing in utilities is the rising market of renewable energy. The National Renewable Energy Lab estimates that by the year 2050, renewable energy could source approximately 80% of the world's energy. The downside of this rising energy market is that it may threaten the futures of traditional utility companies.

In spite of these disadvantages, the utility sector may be the right choice for an investor who can afford taking on the possible risk associated with these stocks. Those who seek a steady dividend income may want to consider investing in the utility sector as well. These stocks are also ideal for those who want to add defensive stocks to their portfolios.

RELATED FAQS
  1. What are the top investing strategies for investing in the utility sector?

    Employ the right strategies when investing in the utility sector, and you can see consistent returns with less risk than ... Read Answer >>
  2. What is the average annual return in the utilities sector?

    Explore facts about the popular utilities sector and discover what the average annual return for the sector has been over ... Read Answer >>
  3. How does the risk of investing in the utilities sector compare to the broader market?

    Learn about the risks of investing in the utilities sector compared to the broader market. Utilities are less exposed to ... Read Answer >>
  4. What are the main factors that drive share prices in the utilities sector?

    Learn why the share prices of companies in the utility sector have sensitivity to interest rates and to changes in the amount ... Read Answer >>
  5. What is the long-term outlook of the utilities sector?

    Discover the long-term outlook for the utilities sector, along with the various aspects that make utility stocks appealing ... Read Answer >>
  6. What is the average annual dividend yield of companies in the utilities sector?

    Learn about the average annual dividend yield of companies in the utilities sector and the overall suitability of the sector ... Read Answer >>
Related Articles
  1. Insights

    Trust In Utilities

    Even in times of economic turmoil, utilities can be a good investment.
  2. Investing

    Utility Funds: A Bright Choice In Bear And Bull Markets

    Gas, electric and water companies' non-cyclical nature can power strong gains in any portfolio.
  3. Financial Advisor

    Why Utility Stocks Are No Longer a Safe Haven

    Utility stocks have been the best performing sector in the S&P 500 Index so far this year but many believe they are now overvalued.
  4. Investing

    The Debt Report: The Utilities Sector

    Discover how blue chip U.S. utilities companies are using debt, and why it was important for the industry to deleverage after the financial crisis.
  5. Investing

    5 Popular Utilities ETFs in 2016 (XLU, NEE)

    Discover how the five most popular utilities ETFs for 2016 can add growth and income to your portfolio. Four of these utilities ETFs outperformed the S&P 500.
  6. Investing

    The Top 5 Utility ETFs for 2016 (XLU, IDU)

    Discover the top utility company ETFs, and learn more about how you can get exposure to water, electricity and natural gas utility companies.
  7. Investing

    Utilities ETFs to Date 2016 Performance Review (UPW, FXU)

    Discover the best and worst performing exchange-traded funds (ETFs) within the domestic and international utilities sector year-to-date.
  8. Investing

    A Surprising Sector Is Leading in August

    While other sectors sag, utilities are heating up in August.
  9. Investing

    XLU: Utilities Select Sector SPDR ETF

    Learn about the Utilities Select Sector SPDR ETF and the benchmark index it tracks, and understand what type of investors may be interested in the fund.
  10. Investing

    Why Utilities are the Hottest Sector (XLU)

    The performance of utilities has made it the hottest sector this year.
RELATED TERMS
  1. Utility Revenue Bond

    A type of municipal bond that is issued to finance utility projects, ...
  2. Utility

    1. An economic term referring to the total satisfaction received ...
  3. Total Utility

    The aggregate level of satisfaction or fulfillment that a consumer ...
  4. Dow Jones Utility Average - DJUA

    The Dow Jones Utility Average is a price-weighted average of ...
  5. Utilization Fee

    Utilization fees are what lenders may charge borrowers, against ...
  6. Law Of Diminishing Marginal Utility

    The Law Of Diminishing Marginal Utility is a law of economics ...
Hot Definitions
  1. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  2. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  6. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
Trading Center