Utility stocks are considered defensive investments because they tend to perform well during difficult economic times; people need electricity, gas, water and telephone services, so their earnings remain relatively stable. Utility stocks generally pay attractive dividends, sharing their earnings with their stockholders, so as interest rates decline on bond investments, people buy utilities for the higher return on investment and lower tax treatment of dividend income. This tends to support the stock prices of these companies.
Research electric utilities. How they generate their power is important. Hydro-power is the cleanest and least expensive source and is only affected by significant drought. Coal and gas-fired utilities are next in inexpensive costs of power. Oil-fired power companies are hurt by high oil costs. Nuclear-fired power can be appealing, but local regulations may hurt earnings.
Research telephone utilities. There has been considerable consolidation in the last couple of decades, which has resulted in some large multi-service companies that hardly resemble the traditional image of a telephone utility. They offer landline service, mobile service and can even be compared to cable companies. Their prices tend to fluctuate more than electric utilities.
Use online interactive stock screeners to select potential investments according to earnings and dividend yield. Check the price charts of stocks you are considering to determine their trading volatility and whether you would be buying in at the top or bottom of their trading ranges.
Read news and analyst research reports on your potential investments before committing your money. Utilities face special challenges from local pollution control initiatives, rate policies and other regulatory issues, which might negatively affect their performance and their dividend payments.
Invest in your selected stock in regular equal increments over several weeks or months. Do this by dividing your money into at least three equal amounts. This is called dollar-cost-averaging, which is an investment strategy that is intended to protect you from investing all your money at a temporary high market price.
- Using dividend reinvestment plans (DRIP) is a painless way to accumulate stock. Most utilities allow you to reinvest your dividends in their stock automatically and at no transaction charge.
- Mutual funds and exchange traded funds are a great way to invest in utilities without having to devote extensive time to researching and monitoring their activities. These packaged investment products provide protection by distributing risk over a number of different stocks.
- Monitor your investments. New regulations, rate restrictions, plant fires and changes in the demographics of a utility's service base, such as the closing of a manufacturing plant, can negatively affect its earnings and cause a reduction in the dividend.
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