Image Source: Federal Energy Regulatory Commission
You know how I know I'm getting old?
When I start to wax nostalgic about old kids' shows I loved to watch like The Electric Company. That show taught me how to read at a very young age. My mom would plop me in front of the TV set so I could watch a young Morgan Freeman play Easy Reader!
I also know I'm getting old when I start thinking about how I'm going to support my single-self in retirement. Talk about my head hurting! One word keeps coming to mind, though - income, income, income! Sorry, I know that's three - mama never taught me how to count very well!
Income comes from different sources like bonds, CDs, and even dividend-paying stocks. One group of stocks that pay cash dividends are utility companies.
Utilities are businesses that provide the necessary basics in our lives like your phone, your water, your gas, and your electric power.
Electric utilities as a general rule pay decent cash dividends to their shareholders, and with good reason. Electric utilities are a natural monopoly in most states. These services give cash dividends back to their shareholders because of the excess cash utilities generate from their operations.
Electric power companies are monopolies which explain their abilities to produce large amounts of money. The reason electric utilities are monopolies is that their infrastructure is expensive to build and maintain. Despite attempts to deregulate electric markets where power is sold, the infrastructure used to deliver electric services is largely monopolistic and thus very regulated by state and federal authorities.
The monopolistic nature of electric utilities poses a concern or two for investors in the sector. The first concern is of advancing technologies with products using electricity. When you think of mobile devices like smartphones and tablets, they utilize and consume less power than laptop or desktop computers making them more energy efficient. Also, with the advance of Internet of Things (IoT) devices, monitoring electric power usage will become more advanced and efficient, leading to lower overall electric power usage.
Another concern about electric utilities is in their financial status. Many public and private utilities have lots of debt on their books. Debt is a fixed cost. While borrowing costs the last few years have been cheap for electric companies, those costs won't stay low for very long.
That's because we're in a rising interest rate environment.
As interest rates rise, holders of utility stocks may lose as investors seek assets with a greater safety of principal in the bond market. Higher borrowing costs will also lead to higher capital expenditure costs for electric utilities. Higher operating costs can make electric companies less safe for investors without a corresponding rise in residential electric rates by state and local governments.
Thus, I believe electric utilities will make for lousy investing over the next two to three years due to both a rising interest rate environment as well as emerging technologies that reduce overall residential usage of electric power. Talk to your registered financial advisor for further information about electric utilities and whether investment in them is right for your time frame and risk tolerance.
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