Investors of all types purchase utility stocks to take advantage of some of the unique features of utility companies. Some investors use utility stocks in a defensive position. Some purchase utility stocks when they believe a company's stock is currently undervalued. However, income investors are most drawn to utilities.
Utility companies for gas, electric, water and other forms of power often operate with the protection of government regulations that act as barriers to entry in a market. Shielded from competitors, utilities can establish themselves as a dominant force in an entire community. On top of that, utilities tend to be very resistant to economic cycles.
With low-demand elasticity and reliable revenue streams, utility companies can afford to pay consistent and relatively high dividends to their shareholders. For this reason many utility stocks are almost treated like bonds by income investors who rely on their holdings for revenue. Utility stock dividends tend to outyield other fixed-income investments and have less volatility than other equities. Retirees, conservative investors and other income-generators gravitate towards utilities.
Growth investors tend to eschew these stocks because utility companies often have limited growth prospects. High dividend payments reduce the likelihood that stock prices appreciate quickly. Value investors, however, do not avoid utility stocks. Using fundamental analysis to spot relatively weak and relatively strong utility companies, value investors pick utility stocks the same way they pick any other; they search for those that do not seem to have their full value reflected in shareholders' equity. The recession-resistant nature of utilities makes utility stocks a good defensive stock. Utilities rarely come out of a quarter with surprising earnings, but they do tend to maintain performance in choppy markets.