Summary: Sectors come and go out of favor. Utilities are now out of favor, and they have been punished in the market. The price of utility stocks is declining because they are competing with other interest-bearing investments and stocks with a better growth story. Read more to find out what you might do with a sector that under-performs.
One thing remains true. All our utility investments are likely to continue to increase their dividends during the next year and the next five years. This week two of our utilities increased their dividend: LNT and ED. In fact, each company with a green arrow is one we hold in our portfolio. So we also will receive an increased dividend from BLK, EPR and O. EPR and O pay monthly dividends.
Potential Actions & Reactions
- Sell your utility stocks and ETF’s. That is certainly an option, but I suggest it is a tough game to know when to get into and out of a sector. If you have sector rebalancing in your written investment plan, then go for it. This option does not fit my investing approach. I buy good-to-great investments and ignore the market’s noise and rush from one asset type to another.
- Do nothing. That is certainly an option. Just continue to hold your utility investments, including ETF’s like FUTY.
- Buy more utilities. This is certainly an option, but when should you buy? The easiest way to do this is to find an ETF that has a low expense ratio and a decent yield and buy blocks of shares every quarter. FUTY (Fidelity® MSCI Utilities Index ETF) has a current yield of about 3% and a low expense ratio of 0.08%. It’s top holdings include NEE, DUK, D, SO, EXC, AEP, ED, XEL and WEC.
- Turn on dividend reinvestment. I generally turn off reinvestment for my larger holdings so that I can invest the dividends in other sectors during up or down markets. However, I will be turning on dividend reinvestment for most, if not all, of my utility holdings.
Conclusion – Rebalancing your portfolio is a necessity if you cannot think like an owner. However, by its very nature rebalancing means you will probably sell your best investments (the ones that have grown in value) to buy assets that are undervalued by the market. That may be a good thing, but do it based on a plan not just to “rebalance.”
Know Your Flocks & Herds 