Utility Stocks: Defensive and Spewing Dividends

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some utility stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Fidelity MSCI Utilities Index ETF could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on utility stocks, sports a tiny expense ratio -- an annual fee -- of 0.12%. The ETF itself is fairly tiny, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This utility-stocks ETF has outperformed the world market over its whole life. IT's been a short life so far, though: The ETF is less than a year old. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why utility stocks?
While some industries, such as automakers or large-appliance makers, see their fortunes rise and fall along with overall economic conditions, other industries, such as utilities, are more "defensive." Their offerings remain in demand no matter what the economy is doing. Better still, many utility stocks pay substantial dividends.

Many utility stocks haven't been stellar performers over the past year, but could see their fortunes change in the coming years. Consolidated Edison, (NYSE: ED  ) slid by 4%, and yields 4.6%. Analyst Paul Freemont at Jefferies recently upgraded the stock from underperform to hold and upped his price target by almost 30% to $58, suggesting it's a bit undervalued. It's not likely to be a fast grower, but it does offer steady income, and a recovering economy can help.

Exelon Corporation (NYSE: EXC  ) , the nation's leader in nuclear energy, sank 5% and yields 4% (though that includes a 41% dividend cut in 2013). In recent years, its revenue has been trending upward, while earnings have only recently started moving up. Part of the problem has been the relatively high cost of nuclear power in an environment of very low gas prices, but rising electricity prices have helped. Zacks Investment Research recently rated Exelon a strong buy, liking its cash flow and significant investments in future growth, such as in smarter meters that can serve customers better and increase efficiencies. Bears worry about threats from wind power, cleaner coal, and cheap natural gas, though.

Southern Company (NYSE: SO  ) was about flat, and yields a tasty 4.7%. It has invested more than $5 billion in "clean coal" facilities and is building nuclear plants, too. In its latest quarter, Southern Company topped expectations for both revenue and earnings. Some worry about Southern's debt load, but others see it as quite manageable, spread over many years and supported by steady profits.

Some utility stocks did gain ground over the past year. PPL Corporation (NYSE: PPL  ) advanced 6% and yields a hefty 4.5%. It's hard for utility companies to grow briskly, but PPL has been helped by rate increases quickly approved by regulators, as well as its unregulated operations. The company has been reining in its coal-fired energy production in light of environmental regulations, replacing much of its lost capacity via natural gas and solar energy. (It's selling a bunch of hydropower assets, though.) PPL Corporation offers investors valuable geographic diversification via its significant operations in the U.K. Meanwhile, PPL's move into smart grids has boosted reliability.

The big picture
If you're interested in adding some utility stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

More from The Motley Fool
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