What Kind of Investors Buy Utility Stocks?
While utility stocks may be more closely associated with income investors and much less so with growth investors, actually, investors of all profiles may choose to purchase and hold 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 through research they come to believe a company's stock is currently undervalued. Utilities are explicitly not used in value-seeking magic formula investing.
Though utility stocks may appeal across investor types, it is true that income investors are the profile most drawn to utilities.
Understanding the Kinds of Investors Who Buy Utility Stocks
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, state, or even region.
- While utility stocks may be more closely associated with income investors and much less so with growth investors, investors of all types purchase utility stocks.
- Utility companies for gas, electric, water, and other forms of power often operate with government regulatory protection that acts as a barrier to entry in a market, which shields companies from competition.
- Retirees, conservative investors, and other investors more interested in income gravitate towards utilities.
- Stock dividends from utility companies often prove to outyield other fixed-income investments and have less volatility than other equities.
- Utilities tend to be very resistant to economic cycles because demand for utilities does not change much compared with most other industries, even in the deepest recessions.
On top of those protections, utilities tend to be very resistant to economic cycles because demand for utilities does not change much compared with most other industries, even in the deepest recessions.
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 investors most interested in current income-generators gravitate towards utilities.
Growth investors tend to eschew these stocks because utility companies often have limited prospects for tremendous growth. High dividend payments reduce the likelihood that stock prices appreciate quickly. But some growth investors may look to utilities in recessionary periods or may invest in newer utilities or those in emerging markets.
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.