Investing in Central Utility Stocks

This is the third in my series on investing in utility stocks based on the sector’s current valuation levels. The series was initially inspired by concerns that utility stocks may be overvalued because they had recently performed very well. When the series first started with Part 1, utility ETF’s were showing the best one-year performance of any sector. By the second installment Part 2, the utility sector had fallen into second place (Utility Sector Performance July 31, 2012). Since that time, utilities have fallen into fifth place with year-to-date performance of only 3.8% (see Utility Sector Performance August 3, 2012 below), this could be an indication that utilities are reaching full value.

As we continue our examination of the utility sector, it is becoming eminently clear that the majority of utility stocks are currently fully valued. Although this is not to say that they are excessively overvalued, we must not forget that the concept of valuation is exaggerated when considering utilities. Because of very low growth rates that most of them possess, even slight overvaluation can relegate returns to below optimal levels. Therefore, we suggest that prospective investors proceed with caution and carefully examine each company that they may be contemplating. In general, utility stocks are not high risk, and are known for high yields. However, they are not known for high growth of either capital or dividends. Once again, we strongly suggest caveat emptor.

Source: The DIV-Net

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