Investors around the world watch Warren Buffett's Berkshire Hathaway (BRK.B -0.69%) with intense scrutiny to see what the Oracle of Omaha is up to. One thing that may surprise some investors is his love of infrastructure assets, like utilities. Here are some ways you can get in on the action without having to pick a winner.
Why utilities?
Utility stocks are not usually very exciting. Historically, they were looked at as "widows and orphans" stocks because they were considered so safe that even the most risk-averse investors would be OK owning them. There are some risky utilities, but the boring side of the business is really related to regulated assets. Effectively, a regulated utility is given a monopoly in the area it serves but must subject its spending and customer-rate decisions to government scrutiny. Regulators generally try to find a reasonable balance between the need for profits and the need for reliable energy and utility services.
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Over the long term, that means regulated utilities tend to be fairly steady performers. The biggest risk is often in utilities that get themselves into trouble by over-leveraging their balance sheets. As noted, Berkshire Hathaway has been a big investor in the utility space. That makes sense, however, given Warren Buffett's penchant for reliable cash-generating businesses and his willingness to jump in financially when companies are struggling or just looking to re-jigger their businesses.
Berkshire is again in the news on this front, having just agreed to buy a stake in a liquified natural gas export terminal from Dominion Energy (NYSE: D). It was a roughly $3.5 billion deal, which isn't that large for Berkshire Hathaway, but follows on the $10 billion purchase of Dominion's pipeline business a few years ago.
In addition to these midstream assets, Berkshire Hathaway also owns PacifiCorp, MidAmerican Energy, NV Energy, Northern Powergrid, Northern Natural Gas, BHE, and Altalink, among other utility and utility-related businesses. In this way, an investment in Berkshire Hathaway is an investment in utility assets, though the company is far more diversified than that.
Getting more focused
If Berkshire Hathaway isn't your speed, but you would still like to get into the utility space, there are plenty of other options. You could, of course, try to pick a few specific utilities, such as NextEra Energy, The Southern Company, or Duke Energy. Some investors, however, would probably be happier with something that required less work. On that front, a utility-focused exchange-traded fund (ETF) like Vanguard Utilities Index ETF (VPU -1.14%) might make sense.
Vanguard Utilities Index ETF has around $6.6 billion in assets, so it is large and unlikely to be closed anytime soon. The dividend yield is 3.3%, which isn't huge but is still well north of the broader market. It includes stocks of companies that "distribute electricity, water, or gas, or that operate as independent power producers." The expense ratio is a very modest 0.10%. Basically, with one purchase, you are getting a broad collection of utilities. The top three positions are NextEra, Southern, and Duke, which make up a combined 27% or so of the portfolio.
Another option would be to buy Utilities Select Sector SPDR ETF (XLU -1.09%). This ETF has $15 billion in assets and a dividend yield of 3.2%. The expense ratio is 0.10%. The key difference between this fund and Vanguard Utilities Index ETF is that Utilities Select Sector SPDR is meant to track the utilities within the S&P 500 index. That's a slightly more narrow focus, as stocks are selected to be in the S&P 500 based, effectively, on how well they represent the broader economy. There's a lot of overlap (the top three holdings are identical), but this ETF only has 30 holdings compared to the 65 that Vanguard Utilities Index ETF owns.
If you are looking for a big income stream, however, you might want to delve into closed-end funds like Reaves Utilities Income Fund (UTG -0.11%). This closed-end fund has around $2 billion in assets and a yield of roughly 8.4%. The dividend is paid monthly as well, which some dividend investors might like. There are a couple of caveats with closed-end funds you need to understand.
Although they trade all day like a stock, they are not ETFs. The net-asset value can and often does differ materially from the value of the stock price. They are also fairly expensive to own, with Reaves Utility Income Fund's expense ratio a lofty 1.4% in 2022. This particular fund also makes use of leverage in an effort to boost returns, but that increases both costs (because of interest expenses) and risk (leverage can both increase returns and increase losses).
That said, Reaves Utility Income Fund's share price has increased about 9% over the past decade despite paying out paying out huge dividends along the way. So assuming reinvested dividends, total returns of the fund is around 110%. That's not as good as the two ETFs above, which had total returns of around 135% or so, but neither of those utility options offers a huge passive income stream.
Plenty of ways to do it
If you have watched Warren Buffett build up a huge utility business and thought that you'd like to get in on that action, you can. Obviously, you could just buy Berkshire Hathaway, but you could also buy an ETF like Vanguard Utilities Index ETF or Utilities Select Sector SPDR ETF. If you're a little more adventurous, and perhaps looking to maximize the income your portfolio generates, you might want to consider a closed-end fund like Reaves Utility Income Fund and its outsized 8.4% yield. Regardless of the way you choose to go, though, you don't have to pick individual winners in the utility sector to be exposed to these "widows and orphans" stocks.
