Utilities reasonably safe to get some dividends?

[fundseeker]

Just looking for a some thoughts on a mid 80s person who is tired of getting 1% or less at the bank putting 25% of his money into utility stocks that are paying about 5% in dividends. He considered Vanguard's Utilities Index Fund Admiral Shares (VUIAX) but it requires a $100,000 minimum, and he does not want to put that much in at once. So, any major downsides to buying four or five utility stocks (Duke, Southern Company, etc.) on his own through his online broker? Also, if he reconsiders VUIAX, does it matter that the fund just got a new manager in December? Thanks for any help. Tom

[cinghiale]

I have no comment on investing in utilities as a sector. However, your friend may want to look at VPU, the Vanguard Utilities ETF. There is no minimum investment amount, though "The fund assesses a 2% fee on sales of shares held less than one year. This fee is paid directly to the fund and therefore is not considered a load" (from the web site).

[Beantown85]

Not reasonably safe when compared to an FDIC insured bank account. I don't think this is a good decision to make just because one is unimpressed with the interest they are getting on their bank account. Bank accounts and individual utilities stocks are lights year apart in terms of risk.

[SpringMan]

I have no comment on investing in utilities as a sector. However, your friend may want to look at VPU, the Vanguard Utilities ETF. There is no minimum investment amount, though "The fund assesses a 2% fee on sales of shares held less than one year. This fee is paid directly to the fund and therefore is not considered a load" (from the web site).

Just to clarify, there is no redemption fee on VPU, there is on the mutual fund admiral share class, VUIAX.

[minesweep]

What percentage of his portfolio is he willing to invest in that sector? Will he feel comfortable if he loses principle? Remember it’s total return, not yield alone that matters. Having said that, there have been worse times to invest in utility stocks. I have individual shares in a utility that I retired from and the stock price has dropped from a high of $54 to around $25 in just over 2 ½ years. My split adjusted cost basis is $9.30 and I’m receiving a 15% dividend. To date, the company has paid 260 consecutive quarterly dividends. So I feel comfortable continuing to hold my shares.

Mike

[grayfox]

Just look at 2008 return for VUIAX

Capital Return Income Return Total Return
-30.40% 2.31% -28.09

From 2007 peak to MAr 2009 trough, max drawdown was even more, like -45% !!

How can something that goes down almost half its value be described as safe?!?

[Default User BR]

You friend needs to understand the risk. Take a look at the chart for VUIAX and see what it did during the recent bear market

http://quote.morningstar.com/fund/f.aspx?t=VUIAX

That's almost a 40% drop peak-to-trough. Dividend-paying stocks are still stocks and carry stock risks.



Brian

[dbr]

A danger in orientation to interest and dividends to fund retirement is the temptation to chase yield into volatile investments that are not understood.

[MarcMyWord]

A danger in orientation to interest and dividends to fund retirement is the temptation to chase yield into volatile investments that are not understood.

Yes, history "hath shown" that people are quite likely to get into trouble when that low savings account interest rate begins to gnaw at them and they start to think they must "do something." And "something" with a higher return is often accompanied by higher risk, as the OP may already have acknowledged by referring to putting "25%" of the portfolio into utilities, rather than all of it.

Just looking for a some thoughts on a mid 80s person who is tired of getting 1% or less at the bank putting 25% of his money into utility stocks that are paying about 5% in dividends.

And, of course, this also raises the question of the degree to which a person at such a late stage in life could absorb substantial loss of investment principal, if it occurs. Despite the current pathetic interest rate, he'll probably never lose a penny of principal in a bank account within federal insurance limits.

* * *

Does the person have eligibility for membership in any credit union? Rates at member–owned financial institutions are often much better, and fees much lower, than in a commercial bank.

Best wishes,

Marc

[dbr]

Of course the question is what is the overall allocation, the full picture regarding income streams, and so on.

This thread is in the context of these investments in isolation, which probably does not lead to good analysis.

[sscritic]

So, any major downsides to buying four or five utility stocks (Duke, Southern Company, etc.) on his own through his online broker?

Individual utilities are safe until they aren't. PG&E was a steady dividend payer until just before it entered Chapter 11 bankruptcy April 6, 2001. It dropped from 30 to 10 between 1999 and 2001.

[Beantown85]

This thread is in the context of these investments in isolation, which probably does not lead to good analysis.

That's true, but the idea of going from a bank account to individual utility stocks has me thinking the person is reaching for yield, moreso than a fundamental shift in their desired AA.

[YDNAL]

Just looking for a some thoughts on a mid 80s person who is tired of getting 1% or less at the bank putting 25% of his money into utility stocks that are paying about 5% in dividends.

Tom,

Please tell your friend to consider the impact of a ____%_ drop in the value of the utility stocks (or a fund). Then, try to make him understand it could take years - decades if you look at Japan - to make-up such drop.

So, any major downsides to buying four or five utility stocks (Duke, Southern Company, etc.) on his own through his online broker?

This is Duke in since 2006:

12/26/2006 $33.21
1/3/2007 $13.875 (dividend)
1/8/2007 $18.56
3/2/2009 $12.15 <- how would your friend react?
1/31/2011 $18.01

Is this what he wants to deal-with for being "tired of getting 1% or less at the bank?"

[dbr]

This thread is in the context of these investments in isolation, which probably does not lead to good analysis.

That's true, but the idea of going from a bank account to individual utility stocks has me thinking the person is reaching for yield, moreso than a fundamental shift in their desired AA.

Yes, it is. The point would be to not even start down that path and instead back up and understand the whole plan in the first place. For one thing, we don't know all of this investor's sources of income nor how his total wealth is invested. Of course, that wasn't the question in the OP either.

[grok87]

Just looking for a some thoughts on a mid 80s person who is tired of getting 1% or less at the bank putting 25% of his money into utility stocks that are paying about 5% in dividends. He considered Vanguard's Utilities Index Fund Admiral Shares (VUIAX) but it requires a $100,000 minimum, and he does not want to put that much in at once. So, any major downsides to buying four or five utility stocks (Duke, Southern Company, etc.) on his own through his online broker? Also, if he reconsiders VUIAX, does it matter that the fund just got a new manager in December? Thanks for any help. Tom

be careful. Utility operating companies are regulated and relatively safe. The holding companies (think Enron) are not regulated and can be risky.
cheers,

[lazyday]

I agree with others that utility stocks are still stocks, and their price behaves more like other stocks than bonds. They are not like slightly less safe bonds with better yield.

I could understand someone with a large holding of total stock market, considering moving a small portion into a utilities index as part of an attempt to reduce total risk. Especially if the investor would be able to hold the shares no matter how bad the market, and collect dividends rather than sell any shares.

Someone who doesn't like risk, but wants higher yield after yields fall, is not only adding risk but probably buying high.

[Grt2bOutdoors]

Just looking for a some thoughts on a mid 80s person who is tired of getting 1% or less at the bank putting 25% of his money into utility stocks that are paying about 5% in dividends.

Tom,

Please tell your friend to consider the impact of a ____%_ drop in the value of the utility stocks (or a fund). Then, try to make him understand it could take years - decades if you look at Japan - to make-up such drop.

So, any major downsides to buying four or five utility stocks (Duke, Southern Company, etc.) on his own through his online broker?

This is Duke in since 2006:

12/26/2006 $33.21
1/3/2007 $13.875 (dividend)
1/8/2007 $18.56
3/2/2009 $12.15 <- how would your friend react?
1/31/2011 $18.01

Is this what he wants to deal-with for being "tired of getting 1% or less at the bank?"

Poor example of "shock value" - it is important to include all of the details in your example above:

Duke spun off Spectra Energy on 1/3/07 - the value of which was 13.875 for each share of Duke Energy held. Assuming you took those shares of Spectra and held them the total value per share equaled $32.75.

Total value on 3/2/09, combined holdings equals $18.16 per share.

Today's value of holdings equals $17.90 for Duke and $25 for Spectra Energy or $30.79 per share.

Yes, it's down, but not tremendously and does not account for any reinvestment of dividends.

[statsguy]

Suggest he fund the 25% from his stock allocation. This will increase his income and may actually decrease his risk... at the expense of some diversification.

Stats

[dbr]

Suggest he fund the 25% from his stock allocation. This will increase his income and may actually decrease his risk... at the expense of some diversification.

Stats

Agreed in principle, but we don't know that he even has a stock allocation, let alone what it is.

Also, income is whatever a person chooses to withdraw from a portfolio whether cashing rather than reinvesting interest and dividend payments or capital distributions or by selling shares of funds or stocks. The income could even be negative if a person invests excess money from income streams that exceed expenses. Income to a portfolio from the investments in the portfolio and income in a person's cash flow accounts are two completely different entities even if a person chooses to artificially enforce an agreement in quantity between them. It is also mentioned that we don't know the investor's sources of income other than the portfolio.

[YDNAL]

Just looking for a some thoughts on a mid 80s person who is tired of getting 1% or less at the bank putting 25% of his money into utility stocks that are paying about 5% in dividends.

Tom,

Please tell your friend to consider the impact of a ____%_ drop in the value of the utility stocks (or a fund). Then, try to make him understand it could take years - decades if you look at Japan - to make-up such drop.

So, any major downsides to buying four or five utility stocks (Duke, Southern Company, etc.) on his own through his online broker?

This is Duke in since 2006:

12/26/2006 $33.21
1/3/2007 $13.875 (dividend)
1/8/2007 $18.56
3/2/2009 $12.15 <- how would your friend react?
1/31/2011 $18.01

Is this what he wants to deal-with for being "tired of getting 1% or less at the bank?"

Poor example of "shock value" - it is important to include all of the details in your example above:

Duke spun off Spectra Energy on 1/3/07 - the value of which was 13.875 for each share of Duke Energy held. Assuming you took those shares of Spectra and held them the total value per share equaled $32.75.

Total value on 3/2/09, combined holdings equals $18.16 per share.

Today's value of holdings equals $17.90 for Duke and $25 for Spectra Energy or $30.79 per share.

Yes, it's down, but not tremendously and does not account for any reinvestment of dividends.

Poor and wasteful response!

What may be "important" to you may be considered clutter and wasted bandwith by others in delivering a simple/straightforward message.

1) The 1/3/2007 spin-off is shown as "dividend."
2) The price drop through 3/2/2009 - with appropriate question of market volatility- is highlighted in blue.
3) So is the price recovery through 1/31/2011.

Case closed!

[fundseeker]

Sorry for being away all day. This work thing really interferes with my personal life. Anyway, thanks everyone for the helpful replies. The situation is one where all of the money (under 500k) which is not needed for ordinary living expenses, is sitting in a bank, so it would be a shift to 25% stocks and 75% CD or something similar. I don't know how it will end, but I am leading him toward a mutual fund with utilities or with utilities plus other companies, something more diverse. We will see. The dividends are tempting. And, I'll suggest checking out a credit union. Thanks again for the help.