Here why Utility stocks are a must for your portfolio

Here why Utility stocks are a must for your portfolio

By Vineet

It is hard to imagine a world without electricity, water supply, and gas supply for our everyday needs. Be it households, industries, or commercial buildings; everything is dependent on utilities. The utility sector is the backbone of modern civilization and holds great significance in the development and growth of a nation.

The utility sector is one of the most stable and reliable sectors of the economy, as there will always be a demand for these services. This is why utility stock prices are among the safest and most profitable stocks in the market. Though the risks in this sector are low, they are still far from being negligible.


In this article, we will cover different aspects of the utility stock market that you should know about before making investments in the utility sector.


What are Utility Stocks?

Utility stocks represent publicly traded companies that provide basic yet important utility services to households and commercial buildings. The companies that are traded in the utility stock market may be involved in just one utility service, such as waste management, or multiples business like electricity and gas.

Utility stock prices are always a safe investment and offer high dividend yields to its investors and generate stable revenues with steady growth. Small and big investors look to investing in utility stocks, as they serve as a great way of diversifying the portfolio and bring stability to the investments. Utility stock prices offer low levels of risk and steady growth, which is perfect for someone who wants to reduce the volatility in their investment portfolio.

Since the services offered in the utility sectors are all among the fundamental necessities of life, such as clean running water, power and electricity, Natural gas, and sewage systems, there are services that are always in demand and experience continuous growth and investments by the government and private investors.


Advantages of Investing in Utility Stocks

Utilities are a popular stock investment for new and seasoned investors alike because of their high demand in the market. Below are some of the most important benefits of investing in Utility stocks:


1.    They are protected against Economic Disorders

One of the most impressive qualities of utility stock is that they are protected against economic turmoil. Irrespective of the market condition, the utility stock prices do not fall too low and always get back up within a short window. This is major because of the high demand and regular cash flow in the sector.

This was evident in the economic downfall during the previous year. As the pandemic shut everything down, the stock prices for most industries suffered deeply, and many of them going bankrupt. However, as people stayed at home and worked online, the demand and revenue for the utility industry rose steeply. Though, in the beginning, there were slight fluctuations due to the frantic market, but the utility stock prices became stable shortly after.


2.    Healthy Dividend Yields

Since the utility industry isn’t too dependent on market performance and experiences steady cash flows, it has the capability of having high dividend payout ratios. Investors can receive reliable and profitable dividend yields for their investments in utility stocks, which makes it one of the preferable stocks in the market.

In order to receive high yields and returns on their investments, investors are advised to always do some research before investing in a company to assess their ability and past trends of paying high dividends.


3.    Tax Benefits

In addition to giving high dividend yields, Utility socks also offer low tax rates to their investors. Investors who hold the stocks for over a period of 60 days receive lower tax rates for the dividend yields they receive. This certainly attracts various big investors, who invest in utility stocks and benefit from its high yield, low tax rate dividends.


4.    Positive Growth

Utility stocks are some of the lowest risk options in the stock market, which giant growth prospects. Since utility sectors provide the necessities to live life, they’re always in high demand. In addition, the expanding global population serves directly as an expansive market. According to reports by the world bank, the rate of annual population growth in America is approximately 0.5%. This directly implies that by the end of the year, the market demand for utilities will increase. This translates to steady yet growth in the coming years. Therefore the companies with the right expansion approach and the infrastructure to meet the rising demand have the best of flourishing in this sector and experience an increase in their utility stock prices.


Things to keep in mind

If there’s one that for certain in the stock market, it is that, no matter how low the risks may be, there are always certain factors that can severely affect the stock prices of a company in any market sector and the utility industry is no exception. Even with all its exceptional positive qualities, there are certain things that investors should keep in mind while investing in the utility sector.

The utility sector experiences slower growth as compared to other industries because of high but constant demands. As the infrastructure develops and the population increases, the market for the utility increases. But that happens at a very slow rate; therefore, the rate of growth in the utility industry is very slow. Therefore, day traders looking for stocks with high returns in a short period won’t benefit much from investing in the utility sector.

One of the biggest risks that come with utility stock is the high rate of fraudulent and illicit activities. Due to its high demand and low-risk nature, the utility sector is quite vulnerable to frauds and scams from companies. Investors need to be very careful while investing in upcoming companies. There have been several cases in the past where companies have projected falsified figures which misguide the shareholders. This brings in another risk in the sector, which is of high scrutiny from the government authorities and the ever-changing laws and regulations.