What Kind of Investors Buy Utility Stocks?

While utility stocks may be more closely associated with income investors and those seeking to protect capital, investors of all profiles may choose to purchase and hold utility stocks to take advantage of some of the unique features of utility companies. With that in mind, here are some of the investor types that prefer to use utilities in their portfolios.

Key Takeaways

• Utility companies are generally shielded from competition due to high entry barriers.
• Retirees, conservative investors, and income investors gravitate towards utilities.
• Utility company dividends often 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, even in the deepest recessions.

Defensive Strategy and Safe Harbor Investors

Some investors use utility stocks in their defensive reallocation strategies. Defensive investment strategies focus on protecting value during down markets. 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.

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.

Income and Dividend Investors

Though utility stocks may appeal across investor types, it is true that income investors are the profile most drawn to utilities. 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.

Note

High dividend payments reduce the likelihood that utility stock prices might appreciate quickly.

Gas, electricity, water, and other utility companies often operate under the protection of government regulations that act as barriers of entry into a market. Shielded from competitors, utilities can establish themselves as a dominant force in an entire community, state, or even region.

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.

Growth investors tend to eschew utility stocks because utility companies often have limited prospects for tremendous growth. However, some growth investors may look to utilities during recessionary periods or invest in newer utilities or those in emerging markets.

Value Investors

Value investors typically love utility stocks. Using fundamental analysis to spot relatively weak and relatively strong utility companies, value investors pick utility stocks the same way they choose any other; they search for those that do not seem to have their full value reflected in shareholders’ equity. However, it should be noted that utilities are explicitly not used in value-seeking magic formula investing.

What Are Good Utility Stocks to Buy?

There are many large utility companies to choose from, such as Duke, Vistra, NextEra, GE Vernova, Sempra, Dominion, and PG&E. However, smaller companies might offer the same protections and opportunities as the large companies do, so it depends on your investing goals, risk tolerance, and preferences.

What Is a Utility Stock?

Utility stocks are shares of companies that operate in the utilities industry, such as providing electricity, gas, and internet services.

How Do I Invest in Utilities?

There are many ways to invest in utilities stocks through your broker, from purchasing shares of energy ETFs or funds to individual shares of utility companies.

The Bottom Line

Utility stocks have various uses in different strategies and portfolios. The trick to using them in a portfolio is to determine what type of investor you are and what you want to use them for.