Despite widespread expectation for rates to rise, we still haven’t actually seen a meaningful jump. And with the economy still just limping along, the Fed should kept rates in the basement for a while.
Which should benefit the best friend of retirement investors — utility stocks.
Utilities are often a go-to asset class for those in retirement, as the sector provides plenty of big income opportunities. After all, consumers, businesses and municipalities still need to power their operations and cool their homes, even in tough economic times. Water still needs to flow and electricity hums through power lines. Ultimately, utilities’ stable cash flows and recession-resistant nature make them ideal candidates for investing during retirement. More importantly, those dividends have historically risen faster than inflation rates.
So utilities still have a place in the portfolios of retirement investors. But how exactly should investors go about adding the sector to a portfolio? Here’s one stock, one exchange-traded fund and one mutual fund to get you started.
Utility Stocks For Retirement Income — Southern Company (SO)
When it comes to utility stocks, retirement income seekers want reliability. And no other stock in the sector could be as reliable as industry stalwart Southern Company (SO). Founded in 1945, SO has grown to encompass several states and has about 45,500 MW of generation capacity.
And while it is considered a “coal-heavy” utility, SO is quickly moving to change that. More than 62% of Southern’s generation capacity comes from other sources — like natural gas, biomass and hydroelectric power. Most recently, it purchased a 50 MW solar farm from First Solar (FSLR). This additional capacity outside of coal will help the utility face the various regulation hazards coming down the pike in stride.
It’ll also help keep funding that 4.9% dividend — a payout that has been steadily rising since 1972.
As for SO stock itself, it’s currently trading for a forward P/E of 15. That’s not exactly bargain territory, and it’s right about the historical norm for utility stocks. Still, Southern’s a decent buy at this price for those investors looking for retirement income.
Utility Stocks For Retirement Income — Utilities SPDR ETF (XLU)
Currently, there are nearly 23 different exchange-traded funds (ETFs) that track utility stocks. However, the best is still the biggest and most widely traded — the Utilities Select Sector SPDR ETF (XLU).
The XLU follows the S&P Utilities Select Sector Index — which is made up of all the utility stocks in the S&P 500. That’s a total of 30 different firms, including sector leaders like Duke Energy (DUK) and American Electric Power (AEP). This focus on the larger utility stocks has helped the XLU return an average of 9.9% per year over the last ten years. That 10-year timeframe includes a period of rising and high interest rates.
Those larger firms have also helped kick out a treasury-beating 3.5% dividend.
As for costs, the XLU is still one of the cheapest options out there. Expenses run just 0.16% — or $16 per $10,000 invested. Trading volume is swift, with the fund trading about 12 million shares per day. Additionally, its large size means there’s plenty of options activity available as well, which allows investors to potentially boost their yield with the fund.
Utility Stocks For Retirement Income — Prudential Jennison Utility Mutual Fund (PRUAX)
For those wanting their utility stocks retirement income in a mutual fund package, the Prudential Jennison Utility Fund (PRUAX) could be a good starting point. The utilities fund carries four-star and Bronze ratings from Morningstar and has been a top performer in its category. In fact, PRUAX has managed to take $10,000 and turn it around $34,000 over the last ten years. That’s about $9,000 more than sector indices.
The key for PRUAX’s hefty returns has been its “broader” utility mandate. That allows it include exposure to several firms within the energy midstream sector. Its holdings include various pipeline and energy distribution stocks — like Energy Transfer Equity, L.P. (ETE). Regulations allow for mutual funds to place up to 25% of their holdings into MLPs, and PRUAX takes full advantage of that fact.
The result: a juicy 3.3% dividend yield for PRUAX.
Now, owning PRUAX isn’t cheap, as expenses run 0.85%. And it does carry a 5.5% sales load. However, the fund has made up for that initial load with its performance. And if you have access to its no-load R-share class (PRUZX), that load drops to zero.
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As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.