Retirees Shouldn’t Fear the Storm in Utilities

by Marc Bastow | November 13, 2012 11:00 am

Retirees Shouldn’t Fear the Storm in Utilities

Investors are keeping a close watch on the damage tallies from superstorm Sandy, with many fixing one eye on utility companies, which are stuck dealing with both the needs of its customers and managing the costs associated with the cleanup.

In New York City alone, Reuters reports[1], the cost of the storm for Consolidated Edison (NYSE:ED[2]) will be around $450 million — a big nut for a struggling utility. Of course, utilities up and down the East Coast are having a rough go of it, and that could weigh on a number of retirement portfolios.

Utility stocks historically are among the most popular assets for retirees, loved for their stability, safety and history of dividend payouts. After all, utilities essentially are legalized monopolies, operating as vital public trusts, increasing rates as necessary for growth and profitability all the while maintaining a hammerlock on competition.

However, utilities have been have taken a bit of a beating this year, with Consolidated Edison among the worst. Let’s take a look at some individual stocks and a couple popular exchange-traded funds from the sector:

Company Ticker YTD Return Dividend Yield
Consolidated Edison ED[2] -10.6% 4.4%
Southern Co. SO[3] -7.8% 4.6%
Duke Energy DUK[4] -6.6% 5%
Pepco Holdings
POM[5] -6.1% 5.7%
Utilities Select Sector SPDR XLU[6] -3.9% 4.1%
iShares Dow Jones Utilities IDU[7] -3.7% 3.5%

While fat yields are nice, they’re not even making up for the capital losses sustained this year.

The storm unfortunately showed once again just how dependent we are on electricity and the serious concerns about our above-ground electrical grid. Talk is cheap, but the issue of burying electrical lines comes up after every storm. The hitch? Time and cost.

A large commitment to investment in infrastructure could result in less money finding its way into shareholders’ pockets. The problem is, it’s still unclear how much of the cost from the storm will be passed on to consumers via rate hikes — and if that happens, anticipate long and contentious hearings between consumers and utility commissions. (Just ask Pepco[8] how difficult it is when consumers don’t believe they’re getting their bang for their buck.)

Regardless, investors shouldn’t hit the panic button. With utilities, bad years come and go, as do good years. Consolidated Edison has returned roughly 4% annually in the past 20 years, not counting dividends. Duke? A marginal annual gain. Pepco? A loss of 1% per year in that time. All the while, the S&P 500 has returned 11.5% without dividends.

As mentioned above, the focus on utility stocks shouldn’t be on the gains, but moreso the long-term income. And right now, investors have a chance to get into utilities at some pretty depressed prices, meaning a great cost on yield.

Yes, you might want to prepare for lower dividend increases in the near-term, particularly for those stocks in the Northeast as they add up the tab for the cleanup. And more importantly, for now, you probably should avoid individual stocks (like Con Ed) that primarily operate in the Northeast until they pin the tail on the damages’ price tag — after all, you could get in at a bigger discount later.

If you don’t want to chance stock-picking right now, consider getting into exchange-traded funds like the XLU and IDU, which allow you to invest in a bundle of utilities, spreading out your risk. Both are trading near year-to-date lows, and both offer tasty yields. Though, while the IDU yields 3.5% and charges 0.58% in expenses, the XLU is at a tastier 4.1% at a cheaper 0.18%.

If you’re working with a 401k, you could consider mutual funds like the American Century Utilities Fund (MUTF:BULIX[9]), a no-load fund that charges 0.68% and yields roughly 3.5%.

Despite some lackluster performance, utility stocks still have a solid place in a retirement portfolio. You just have to let them do their slow, steady thing.

Marc Bastow is an Assistant Editor at InvsetorPlace.com. As of this writing, he was long SO.

Endnotes:
  1. Reuters reports: http://in.reuters.com/article/2012/11/12/storm-sandy-doe-idINDEE8AB02920121112
  2. ED: http://studio-5.financialcontent.com/investplace/quote?Symbol=ED
  3. SO: http://studio-5.financialcontent.com/investplace/quote?Symbol=SO
  4. DUK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DUK
  5. POM: http://studio-5.financialcontent.com/investplace/quote?Symbol=POM
  6. XLU: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLU
  7. IDU: http://studio-5.financialcontent.com/investplace/quote?Symbol=IDU
  8. ask Pepco: http://investorplace.com/2011/07/pepco-investors-nyse-pom/
  9. BULIX: http://studio-5.financialcontent.com/investplace/quote?Symbol=BULIX

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