Utility Stocks Investing in a Bear Market
Utility stocks are the stocks of companies that generate, transmit or distribute electricity, water or gas from their facilities. As such, these stocks are issued by companies whose services are an indispensable part of peoples’ lives and are a traditional safe haven in a down economy. Utilities have a history of paying solid and reliable dividends while providing stability to an investment portfolio.
Defensive Stocks
Utilities are seen as defensive or non-cyclical stocks in that their revenues are not highly dependent on the state of the economy. Even in difficult economic times, people need the heat, light, water and services provided by these companies. While utilities are not completely immune to
economic downturns, they are less likely to fall sharply in bear market conditions.
Income Producing
Utility stocks can also make sense for an investor looking for a source of income as many of them pay a generous dividend. It follows, then, that utility stocks offer limited future growth and capital gains as their excess cash flow from profits are often directed toward their investors.
The Effect of Rate Cuts
Utility stocks tend to perform well when interest rates fall because the economic concerns that accompany a rate cut (e.g. a sluggish economy) are often favorable for utility stocks. Also, as rates fall, the dividends offered by utilities are more attractive to income-seeking investors.
Utility Funds
Utility funds invest primarily in the securities of utility companies but also may invest the suppliers of these companies. These funds offer instant diversification within the utilities sector along with professional fund management. Utility funds usually identify income as the primary fund objective and growth as a secondary objective.
As in most industries, there are exceptions to the rule. The Enron scandal, for example, temporarily tarnished the reputation of utilities. In general, though, utility stocks have provided solid income and performance to the portfolios of older and more conservative investors for many years.
More about investing in utility stocks
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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