Utilities—the Smarter, Safer Choice

08/25/2010 1:00 pm EST


Richard Young

Editor, Young's Intelligence Report

Richard C. Young, editor of Intelligence Report, says a utilities ETF and a couple of high-quality utility stocks pay nice dividends and offer solid, steady returns.

With new money, the Utilities Select Sector SPDR ETF (NYSEArca: XLU) remains one of my top fund choices.

The fund is loaded with utilities from my [master list], including Exelon (NYSE: EXC), the largest owner/operator of nuclear plants in the United States; NextEra Energy (NYSE: NEE) (formerly FPL Group), the largest North American generator of renewable power from solar and wind energy; Duke Energy (NYSE: DUK), one of the largest electricity companies in the US, with over four million customers; PG&E (NYSE: PCG), a supplier of gas and electric to approximately 15 million people; and Entergy (NYSE: ETR), the nation's second-largest nuclear power generator.

Other industry leading names in XLU's top-ten holdings are companies like Southern Co. (NYSE: SO), the premier utility of the Southeastern US, and Dominion Resources (NYSE: D), one of the nation's largest electricity generators and the operator of the nation's largest natural gas storage system.

Serving throughout Georgia, most of Alabama, and in parts of Florida and Mississippi, Southern Co. sells electricity to 4.4 million customers and owns 42,000 megawatts of generating capacity. Adding a bit of diversity to the Southern Co. operating portfolio are two subsidiaries—SouthernLINC and Southern Telecom—which operate a wireless communications network and a fiber-optic wholesale business. (The stock closed above $36 and yielded 5.1% Tuesday—Editor.)

Dominion Resources owns strong portfolios of assets in both the electricity and natural gas industries. Dominion is the nation's largest natural gas storage facility operator. Its storage facilities have a capacity of 942 billion cubic feet. Dominion's primary markets are the [Midwestern, mid-Atlantic, and Northeastern US.]

The coming transference of massive amounts of natural gas from the Southwestern producing regions make Dominion's position as the leader in the gas storage industry appealing. Its markets in the Northeast and the Midwest will be the final destination for much of the Haynesville Shale and Bossier Sands natural gas. (Dominion closed above $44 and yielded 4.2% Tuesday—Editor.)

In XLU's top 20, there are another two [of my favorites]: Progress Energy (NYSE: PGN) and Xcel Energy (NYSE: XEL). Progress Energy is a 102-year-old electric utility company that serves 3.1 million customers in Florida and North and South Carolina. Xcel Energy is the United States' number-one wind-power provider and its fifth-largest utility in watt hours of solar generation.

If you are still skeptical of utilities because you believe they are only appropriate for widows and orphans, allow me to lay some math on you. Over the past five years—one of the most volatile investment environments in my lifetime—the return on the Standard & Poor’s Utilities Sector index was 24.4%, while the S&P 500 gained only 3.75%. Utilities beat the market by 20.65 percentage points. XLU yields 4.3%. (It closed below $31—Editor.)

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