Utilities are viewed as boring and slow-growth companies. Investors looking for outsized gains might just avoid them altogether. However, on the flip side, they can benefit your portfolio in multiple ways and help to boost your returns.
Add stability to your portfolio
Utilities typically have lower betas than the market and are therefore less volatile. Because it’s a smoother ride to hold on to them, investors are less inclined to trade in and out of them emotionally.
The beta measures the volatility of a stock. If a stock has a beta of one, its volatility is the same as the market–if the market rises or falls by 1% or 3%, for example, the stock will rise and fall in a similar pattern.
Investors should note that stocks’ betas change over time; it’s only a relative measure to the market. Additionally, just because a stock has a low beta, doesn’t mean that it can’t have large declines over time. Fortis just declined 9% from its recent high in October.
The beta is not the only thing that makes utilities more stable investments. The business nature of a quality utility is more stable than most businesses out there.
Just like other stock investments, investors should aim to buy utilities at a reasonable or, better yet, discounted valuation. When you buy quality utilities at a reasonable valuation, it will add stability to your portfolio. If the market declines 20%, for example, Fortis will likely fall much less.
Get a nice income
Other than adding stability to your portfolio, utilities also tend to pay big dividends. This characteristic also helps long-term investors to hold on to their shares.
At $40 per share, Fortis offers a 4% yield, which is almost 1.5 times that of what the market offers. Fortis has raised its dividend for 43 consecutive years, and its payout ratio remains sustainable.
Some investors avoid utilities, thinking the stocks are boring and grow slowly. However, utilities may not be as slow growing as they think.
Fortis’s management can foresee the company’s stable growth to support average dividend growth of 6% per year through 2021. Coupled with its 4% yield and its reasonable valuation, Fortis can deliver roughly 10% total returns.
Quality utilities such as Fortis can add stability to your portfolio while generating a safe, above-average income and delivering estimated returns of 10%.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Kay Ng owns shares of FORTIS INC.