Utilities [Utility stocks]

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cliff
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Utilities [Utility stocks]

Post by cliff » Thu Aug 20, 2015 10:57 am

My father owns a utilities stock which I have followed. It has done quite well. What especially strikes me is it continues to do well in the current market. Plus it pays a 4% dividend. Utilities are not mentioned often. It strikes me that they are a tremendous diversifier and perhaps should be over weighted in any diversified portfolio.

_robert
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Re: Utilities

Post by _robert » Thu Aug 20, 2015 11:09 am

You could be right.

The problem I have with personally jumping into stuff like this is timing and randomness. I have no idea if NOW would be the best time to buy that stock and I'm not willing to bet on my smarts to think that it is. Worse yet, I then have to be smart about when I sell the stock in order to jump into the next thing. If I don't do this, then I'm stuck hoping this single stock outperforms the market as a whole over a long period of time, which is also tricky.

Next, that stock could just be the beneficiary of randomness. If there are 1000 utilities stocks and half of them outperform the market in year 1, and half in year 2, and half in year 3, and so on... you might be looking at a stock that has simply "lucked" it's way into success. Again, not something I'm willing to bet the farm on. For more info on this check out "A random walk down wall street" or "Fooled by randomness" for a much more eloquent argument.

Personally, I'd avoid this stock. I think the best plan is to stick to an allocation of passive index funds and ride those through think and thin. However, if you want to take a small percentage of your net worth and play around with single stocks like utilities (or buy a bunch of Tesla when a car catches on fire, or whatever else you're interested in) then go for it. I just wouldn't do that with the money you want to use to feed your family's addiction to food, clothing, and shelter after retirement.

My $0.02

Grt2bOutdoors
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Re: Utilities

Post by Grt2bOutdoors » Thu Aug 20, 2015 11:13 am

cliff wrote:My father owns a utilities stock which I have followed. It has done quite well. What especially strikes me is it continues to do well in the current market. Plus it pays a 4% dividend. Utilities are not mentioned often. It strikes me that they are a tremendous diversifier and perhaps should be over weighted in any diversified portfolio.


"They" or "it" - the reason why it may have done well in the past may be because of company-specific events or because of a general decline in yields, or something else like demographic or regulatory policy changes. One should do their homework before contemplating making a sector bet as you suggest above. Not all utilities are cut from the same clothe.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

itstoomuch
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Re: Utilities

Post by itstoomuch » Thu Aug 20, 2015 11:48 am

I have moved about 75% of our (65/68) trading accounts' to high quality, utility, div payors. I was a bit early this year (could have waited till Feb). Just starting to breakeven on the buy-on-dips, including the divs. YMMV !!

disclaimer: We have the Number. Looking for future Income generation, divs are being reinvested or held in cash.
GL :beer
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

cliff
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Re: Utilities

Post by cliff » Thu Aug 20, 2015 7:03 pm

Just a few facts after today's awful market. Vanguard utilities index -.73; S&P -2.11...Correlation from Dan Weiner with S&P 500...REIT .45; Utilities Index .31...

Just some food for thought for diversification. Utilities are not too exciting but with 4% dividends and the lack of high correlation with the market every investor should consider...

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Phineas J. Whoopee
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Re: Utilities

Post by Phineas J. Whoopee » Thu Aug 20, 2015 7:14 pm

^ The problem gets to be with "diversifying" the stock market by using the stock market. Different sectors behave differently at different times, yes, but they're all part of the market already.

I don't claim to be the Académie anglais, but in many of the posts suggesting one diversify by using REITs, or utilities as in this thread, or dividend payers, or small value, or whatever, when the posters use the word "diversify" they mean "concentrate the portfolio into certain types of stocks."

Diversification == concentration?

I think it all gets very newspeaky and confusing. I know it was for me when I was new here.

PJW

Grt2bOutdoors
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Re: Utilities

Post by Grt2bOutdoors » Thu Aug 20, 2015 7:31 pm

cliff wrote:Just a few facts after today's awful market. Vanguard utilities index -.73; S&P -2.11...Correlation from Dan Weiner with S&P 500...REIT .45; Utilities Index .31...

Just some food for thought for diversification. Utilities are not too exciting but with 4% dividends and the lack of high correlation with the market every investor should consider...


Steak #1 is on sale, $0.73 cents a pound off. Steak #2 is on sale, $2.11 off a pound. For accumulators, which one sounds better? :)
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

grog
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Re: Utilities

Post by grog » Thu Aug 20, 2015 8:09 pm

Traditionally utility companies have been seen as "widows and orphans" stocks: safe, stable, good dividends. This is because they are regulated monopolies that provide an essential service. To prevent them from banking too much :moneybag , states negotiate with them to set rates. Utilities are usually seen as a conservative, defensive investment, yet Vanguard rates their utilities etf a 5 out of 5 for risk. Vanguard seems to rank all sector funds a 5 by default though, presumably due to the concentration risk. Even that aside my understanding is that the industry is evolving and becoming riskier than it once was (more competition at different points in the supply chain, energy trading, etc.). Though I am noticing that the beta of the etf is still only around 0.4, so a lot of the traditional character still seems to be there.

If I were to invest in them, I would be worried most about political risk and technological disruption. Historically, regulators have allowed them to operate at a certain profit level, but there's no guarantee that states won't refuse needed rate increases. And because there are large fixed costs, it's not clear that just shutting down would be an option, even with losses or very low profits. (In other words, they could be forced to price so that the operating margin is still positive but not high enough to recover the sunk capital costs.) And then with technological disruption, with the possibility of solar and batteries and other means of getting off the grid, that could hollow out their customer base enough to cause them trouble (especially if states don't allow them to recover the lost revenue from the smaller remaining customer pool.) These are just possibilities, however, and I suspect most likely the sector will be fine, though I prefer to the diversification of the broad market.

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LadyGeek
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Re: Utilities [Utility stocks]

Post by LadyGeek » Thu Aug 20, 2015 8:14 pm

This thread is now in the Investing - Theory, News & General forum (utility stocks). I also retitled the thread.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

kolea
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Re: Utilities [Utility stocks]

Post by kolea » Thu Aug 20, 2015 9:02 pm

cliff wrote:My father owns a utilities stock which I have followed. It has done quite well. What especially strikes me is it continues to do well in the current market. Plus it pays a 4% dividend. Utilities are not mentioned often. It strikes me that they are a tremendous diversifier and perhaps should be over weighted in any diversified portfolio.


Over-weighting is not the same as a "tremendous diversifier", in fact pretty much they are the opposite (as other posters have pointed out). It is important that you understand the risk of concentrating holdings in a single sector. Personally, the only real risk I see in high dividend stocks is that they tend to be concentrated in a few sectors (like utilities and financial), but if you prefer dividend stocks and you understand the risks they entail, then go for it.
Kolea (pron. ko-lay-uh). Golden plover.

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