Conventional wisdom has long held that the risk-averse and income-seekers, such as your grandma (or you!), should plop their pfennigs into utility stocks and utility mutual funds. Conventional wisdom has changed.
The utility industry used to be a fairly sleepy one. Its companies were heavily regulated and tended to sport stable income streams that paid out regular (and often hefty) dividends. In recent years, though, things are different. The industry is more dynamic, less regulated, and riskier (think Enron). As companies jockey for competitive advantage and aim to grow, their focus is no longer steady maintenance or reliable dividend payments.
An article in The Houston Chronicle explains that since deregulation began in the '90s:
Many telephone and electric companies lost their monopolies, and branched out into riskier ventures, such as electricity trading and high-speed Internet access. In the process, many took on debt and trimmed dividends.... So far this year, [utility] funds lost an average of 29.2%, according to fund-tracker Lipper. Over three years, utilities funds averaged a loss of 12%... Total assets in utilities funds through August dropped to $13.7 billion, down from $20.4 billion at the end of 2001.
This change in the utility landscape has got some mutual fund companies concerned, partly due to the poor performance of their funds focused on utilities. Take Vanguard, for example, which happens to be the country's No. 2 fund company. It's planning to transform its "Vanguard Utilities Income Fund" to the "Vanguard Dividend Growth Fund," giving the renamed entity a much broader scope and a better chance of serving investors well by seeking the most solid and promising dividend-paying investments -- both within and outside the utility industry. Strong Funds did the same thing last year (while also increasing its management fee for the renamed fund).
The bottom line is not that everyone should now avoid utilities. Instead, understand the new environment and have realistic expectations. For some of us, there should still be a place in our portfolios for utilities. As this USA Todayarticle points out, "... the juicy dividend yields that utilities offer are probably the best argument for utilities now." As always, learn more before taking action.