Sector investing offers targeted insight into the stocks of companies in specific segments of the economy. The utilities sector includes companies such as electric, gas, or water utilities, or those that operate as producers or distributors of power.

As of July 2022, the utilities sector had a market capitalization of over $1.58 trillion.1 Although utilities are private, for-profit companies, they are part of the public service infrastructure and are heavily regulated.

Those who include utilities in their portfolios hold them as long-term investments and commonly use them to generate income through dividends.

• The utilities sector includes the stock of companies such as electric, gas, and water utilities.

• Investors commonly buy utilities as long-term holdings for dividend income and stability.

• The utilities sector is often used as an investment during economic downturns.

• "Clean" energy initiatives have some analysts forecasting strong growth for the utility industry in the 2020s.

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Utilities include large companies that offer multiple services such as electricity and natural gas or specialize in just one type of service, such as water. Some utilities rely on clean and renewable energy sources like wind turbines and solar panels to produce electricity.

Utilities typically offer investors stable and consistent dividends, coupled with less price volatility relative to the overall equity markets. As a result, utilities tend to perform well during recessions and economic downturns. Conversely, utility stocks tend to fall out of favor with the market during times of economic growth.

Utilities require a significant amount of expensive infrastructure and consequently carry large amounts of debt on their balance sheets. These debt loads make utilities hypersensitive to changes in the market interest rate. And because utilities are capital-intensive, they require a continuous inflow of funds to finance infrastructure upgrades and new asset purchases.

As of July 2022, a high level of inflation has raised new challenges for utilities. During the inflation of the 1970s and 80s, utilities faced large debt, soaring fuel costs, blackouts, increased regulation, and bankruptcies. Utilities that succeed through economic challenges will likely continue to rank among the best investments for safety, generous income, and steady wealth building.2

Because utility stocks pay reliable dividends, investors often favor them over lower-dividend paying equities. After the financial crisis of 2008, the Federal Reserve cut interest rates, to stimulate the economy.3 As a result, investors flocked to utilities, as safer investments as utility companies are a viable defensive choice for investors during macroeconomic downturns.

If interest rates rise, investors can find higher-yielding alternatives than utilities. When a utility pays a dividend yield of 3% but increases in interest rates increase Treasury bond yields to 4%, the utility company would have to increase its dividend payout to match the rising yields.

Aside from investing in the individual stocks of utility companies, investors may also purchase regional utilities or invest in exchange-traded funds (ETFs) or sector funds containing a basket of utility stocks of companies located throughout the U.S.

The Fidelity Select Utilities Portfolio (FSUTX) includes the holdings of 29 utility companies as of March 2022 and an annual dividend yield of 1.52%.4 The Utilities Select Sector SPDR Fund (XLU) is one of the largest utility sector funds, with $15.5 billion in net assets, and is one of the most actively traded utility ETFs, with more than 18 million shares traded daily. The fund typically pays a dividend yield of around 3%.5

The XLU's dividend yield beats the yield for the S&P 500 equity ETF, SPDR S&P 500 Trust ETF (SPY), which as of July 2022, pays around 1.56%.

Utilities are stable investments that commonly provide a regular dividend to shareholders, making them a popular long-term buy-and-hold option. Dividend yields on utility stocks trend higher than those paid by other equities.

During times of economic downturns with low-interest rates, utilities become attractive. They exhibit lower volatility and provide a desirable source of predictable investment returns from the dividends they pay on their shares.

Utilities, however, face intense regulatory oversight and require expensive infrastructure that needs routine updating and maintenance. To meet these infrastructure needs, utility companies often float debt products that, in turn, increase their debt loads. This debt also makes these services particularly sensitive to interest rate risk. Should rates rise, the company must offer higher yields to attract bond investors. 

Pros

• The utility sector offers stable, long-term investments with a regular and attractive dividend.

• Utilities act as a haven investment during times of economic downturns.

• Utilities offer many options for investment including bonds, ETFs, and individual company stocks

Cons

• Intense regulatory oversight causes difficulty in raising customer utility prices to increase revenue.

• Expensive utility infrastructure requires continual upgrades and maintance.

• During times of high market interest rates, utilities become less attractive and must increase their bond yields.

In 2020, President Joseph Biden called for the country to achieve a 100% clean energy economy and net-zero greenhouse gas emissions no later than 2050, committing nearly $2 trillion in investment to achieve this goal.6 The energy and utility industry has an opportunity to advance its grid modernization and clean energy efforts by tapping into funds allocated in the Infrastructure Investment and Jobs Act which includes $65 billion earmarked for upgrading the national power infrastructure.7

A 2022 industry outlook report by Deloitte identified five trends for the utilities industry which include enhanced competition, expansions in infrastructure, greater electrification of transportation, an emphasis on disaster readiness, and traditional energy players entering the renewable energy field.8

According to Douglas Simmons, a Fidelity utility sector portfolio manager, the fundamentals of utilities in 2022 look very robust overall, driven by the ongoing shift toward renewable energy sources and away from fossil fuels.9

However, utilities remain wary of regulations that may force the closure of power plants, according to Paul Patterson, a financial analyst who tracks the industry at Glenrock Associates LLC. Utilities are largely supportive of the tax credits called for in “Build Back Better,” which would provide more than $300 billion in direct subsidies from everything from wind and solar to transmission and storage to carbon capture and nuclear. Patterson noted, “There is a tremendous amount of investment opportunity, and they want the rules written in a way that makes the most sense for them.”10

Renewable energy resources are expected to grow from 12% of the US energy mix as of 2021 to 39% by 2030, according to Morgan Stanley.11

Public utilities are regulated by the government or state and commonly supply electricity, gas, or water to a region or area.

Globally, the largest utility is NextEra Energy, a provider of electricity-related services and a market capitalization of $158B as of July 2022. Its principal subsidiary, FPL, is a rate-regulated utility engaged primarily in the generation, transmission, distribution, and sale of electric energy.1213

The utilities sector is an industrial category of stocks, consisting of companies that provide basic everyday amenities, including natural gas, electricity, water, and power. Typically, investors buy utilities stocks as long-term holdings. These equities typically feature stable prices and good dividend income. The movement toward "clean" energy, along with competition-enhancing legislation and a presidential administration committed to renewable energy resources, has some financial analysts forecasting strong growth for the utilities sector in the 2020s.

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