Utilities stocks and ETFs usually weather a downturn in an economic cycle better than most other companies largely because of their predictable earnings.
Low interest rates are forcing investors to look beyond low yielding money market rates and bank CDs for income. To meet your income needs you need to use the right investment products.
Utility stocks and ETFs are an excellent choice to help you build the income portion or your investment portfolio. In many cases investors can net more income from the dividends paid by utility stocks and ETFs. Why? Because the qualified dividend income is taxed at a maximum rate of 15% (or to 5% for taxpayers in the lowest two tax brackets) whereas the taxable income from bonds is taxed at higher ordinary income rates. Even though most utility stocks and ETFs posted negative performance last year, they are among the best performing industry sectors so far in the early going of 2009.
Here are a few utilities buzz stocks and ETFs we’re watching:
1. Vanguard Utilities ETF (NYSEArca: VPU): VPU only fell 28% in 2008, compared to the S&P 500′s 38% drop. The 12-month yield is 3.9%, and the median market size of utilities stocks in the ETF is $10.7 billion. Holdings include: Exelon Corp. (NYSE: EXC), Southern Co. (NYSE: SO), FirstEnergy Corp. (NYSE: FE) and American Electric Power Co., Inc. (NYSE: AEP)
2. NRG Energy, Inc. (NYSE: NRG): Timing could be everything with this wholesale power generation company. Exelon Corp. offered $6.2 billion to buy NRG in late 2008. In an open letter to its shareholders, NRG stated that it would “support a deal with Exelon at a fair price but, at this point, we have no reason to believe they are willing to offer a fair price.” We expect Exelon to come back with an offer NRG can’t refuse. If this happens, NRG shareholders win.
3. Southern Co. (NYSE: SO): Smart grids–remember those words. They’re likely to pop up a lot over the next few months as stimulus dollars start pouring in. Smart grids combine special meters, wireless technology, sensors and software so customers can closely monitor energy use cut and back when the grid is stretched to its limit. Southern Co., which powers a lot of Alabama, Georgia, Florida and Mississippi, has been one of the early leaders of this technology. Shares of SO have been down about 15% over the past 12 months, more than half of the S&P’s decline. The company maintains a healthy 20% operating margin. John Quealy, an analyst with Canaccord Adams in Boston, told Reuters that the companies best positioned to benefit from the stimulus are those that are running pilot projects and have already started the change.
Here’s a cool video on why utility stocks rule (air date: November 25, 2008):