How to Screen for Utility Stocks
When searching for the right utility stock, use the following filters:
- Dividend Percentage – Don’t just choose the highest yield. Be sure you keep intermediate dividend percentages as well. Your annual yield should be greater than 1.50%
- Dividend Payout Ratio – This should be low. Stable utilities have a dividend policy that keeps payout ratios around 30% to 50%
- Price-to-earnings Ratio – A utility stock should have price and earnings stability. Any utility with a P/E ratio above 20 should be filtered out. A utility with negative earnings should be ignored.
- Beta is a way of measuring price movement versus the overall market. Since you want little price movement, your beta should be low. Consider using a beta of 0.50 to 1.00
Detailed filter on barcharts.com
What are utility stocks?
Utilities are companies who provide electric power, natural gas, or water to businesses, governments, and residential buildings. For more information, see Top Utility Stocks.
When should you invest in utilities?
Most investors should always have a position in utilities. Utilities provide income through dividends and lowers the overall risk of a portfolio. Its best to accumulate utilities when the stock market is hot. Utilities can provide a gauge of market over-exuberance if they are significantly under-valued. During market corrections, investors typically flee to utilities. This will cause an increase demand for utilities. If this happens, its typically a good time to reduce your position in utilities and find under-valued opportunities in other sectors.
Note: these are generalizations. The behavior of the market is evolving as more algorithmic trading occurs.
What percentage of my portfolio should be utilities?
For a new investor, utilities should make up 10% to 15% of your portfolio. Ideally, an investor has a position in the utility service they use. Utilities are great for new investors because a utility is a recognizable brand with an easy-to-understand business. Utilities are also great for new investors because they provide dividend income while also having low volatility.
For more information, see the Top Stock for New Investors
For advanced investors, choose a percentage based on your investment strategy. Aggressive investors should keep a small position in utilities instead of holding a cash position. To learn more, read How Much Cash Should I have in my Portfolio?.
Investors looking to preserve wealth or generate income may want to hold up to 50% of their portfolio in utilities depending on current business cycle. As utilities are the more aggressive addition to a wealth preservation or income generating portfolio, its best to accumulate utilities during a market recovery and expansion while reducing exposure during a market correction.
Why are utility stocks defensive?
Screening for utility stocks
There are many great screener tools out there that can help you find the right investment. Manifest Investing is a powerful research tool for investing. For a free stock screener, you can use barchart.com to do a basic stock search.
How to research utility stocks before you invest
Most investors use utility stocks to lower the volatility of their portfolio and grow their income. Hence, the filters for a utilities stock screener will be consistent across most investors. However, after you filter down to a 10 to 20 stocks, its best to do an in-depth analysis of the utility.
Your analysis checks that the company will continue to meet your qualifications in the future. For example, a poorly managed utility may stop paying dividends if they are losing money. Your stock filter is only finding companies who paid a dividend last quarter. Your analysis is looking to see if they will pay that dividend for the next 5 years.
Finding Utilities for Income
Below we explain why the screen ranges were chosen and what additional research you must conduct before choosing to invest in a utility stock.
Annual Dividend Yield Percentage
What are utility stocks all about? They’re all about the dividends of course! A utility stock screen should look for:
- Medium to very high dividends.
- These yields are greater than 1.5%
Utility stocks with a low dividend are typically small-cap utilities which are focused on growth. They will be more volatile and more useful in a growth-oriented portfolio. The utility may also be in trouble. A utility in duress will cut its dividend to conserve money. These utilities will have a strong drawdown before price stabilization occurs again.
Read More: The Top Dividend Stocks to Buy Now
High Yield Utility Stocks
When looking for the best utility stocks, new investors may get too concerned over dividend yield. A few tips for new investors researching utility stocks for high yield.
1.) The Actual Dividend Amount in Dollars per Share is Irrelevant
Do not ever take this into consideration. This amount is set by the company’s board based on the company’s dividend policy. However, for an investor, you are concerned about the dividend amount versus how much you must pay for the stock.
2.) A Dividend Yield Percentage is Historical by it Nature
A dividend yield percentage is your baseline to determine how good a stock’s dividend yield is. But remember, a stock’s dividend yield is always historical. This is the yield you will get if you buy the stock at that moment and the board agrees to continue to pay that amount. The board has no obligation to pay a dividend and the price can significantly change in the future.
3.) High Yields are Suspicious
When a dividend yield exceeds 5%, you need to learn more as to why this yield is so high. If the company is paying out too much of its earnings in dividends, then there is a risk that the company will be unable to pay that dividend out in the future as they are not spending enough to maintain and grow the business.
If future earnings look to be faltering, investors may be fleeing the stock as they suspect the stock price will go down, regardless of the yield. This means that your high yields may be eroded by a fall in the stock’s price.
Dividend Policy and Dividend Payout ratio
A dividend policy is guidance given by the company’s board of directors and Executive on how dividends are distributed. A policy ensures investors that the company takes prudent steps to make sure high dividends are paid without crippling the company. Low dividends and a crippled company are two extremes that investor do not want. A company that does not follow their dividend policy may lose the trust of investors.
Low P/E ratios
New investors should look for a utility stocks with a P/E ratio of 6 to 25. If the ratio is too low, then investors may be forecasting future problems with the company’s earnings. If the ratio is too high, then investors are either speculating that company’s earnings will grow rapidly, or investors are using the stock as volatility hedge. Both prospects means the company’s price makes it too risky for an income or wealth generation focused strategy.
Regulated vs. non-regulated utilities
In general, non-regulated utilities may have multiple sources for the vital resource they are providing[1]. For example, a non-regulated electric utility could get electricity from multiple companies. In non-regulated utilities, power generation, transmission, and distribution are monopolized by a single utility.
Different utilities will have different business plans based on regulation and non-regulation. Knowing which type a utility is will help understand the company’s competition, stability, and regulatory environment.
Stock Volatility - Are Utilities Really Safe?
Stock volatility can be measured in many ways, but for our analysis we measure the standard deviation of a stock’s price change over a 5-year period. A higher standard deviation means larger price swings. Investors in the company may be unsure of the company’s future and that insecurity will translate into higher price swings and speculation.
Stock volatility was a variable used to determine the top electric company stocks and the top water company stocks.
The other variable used in our analysis that may not be in a stock screener is max drawdown. This is the largest price fall a stock incurred from a local high price to a local low price. Max drawdown isn’t always in stock screeners, but we use it in our analysis as its important to know a worse case scenario loss could be when by a utility stock. Even utility stocks in our analysis saw a 30% to 50% drawdown in the last 5 years.
Utility stocks act as a volatility dampener for your portfolio. Because of this, utilities are defensive stocks and are historically the most defensive sector in the stock market. But to say utilities are safe stocks is an assumption we should address. Utilities had a 35% drawdown in the last five years. Nonetheless, these utilities mostly recovered. Utilities can be volatile, but they are more defensive than other stock sectors. For the most part, they will recover losses so are typically safe investment.
Read More: The Top Safest Stocks to Buy Now
Utility Portfolio Diversity
Another variable some stock screeners do not have is how many States a utility conducts business in and how many customers a utility has. When a utility has a large customer base, its likely that they are in multiple regions and hence will not get completely shutdown by weather events. By conducting business in multiple states, the utility can diversify their risk to different state regulations[2].
Company Quality
After you’ve found a list of utility stocks you’ve screened for, you must now analyze the utilities. One of the best things to do is see if it made our top utility stock picks list. Our list is algorithmically generated from thousands of user’s giving their insight. Our algorithms take into account the consistency and performance of the analysts while also taking into account variables used in the screeners. Our algorithms also scans these analysis for depth and thoroughness. Theses are great reads to ensure your screened utilities are backed by a thorough qualitative analysis.
References
- What is a Regulated vs. Deregulated Utility? by Laurel Kruke
- The Best Water Utilities that pay Dividends by the StockBossUp Staff
How to Screen for Utility Stocks
When searching for the right utility stock, use the following filters:
Detailed filter on barcharts.com
What are utility stocks?
Utilities are companies who provide electric power, natural gas, or water to businesses, governments, and residential buildings. For more information, see Top Utility Stocks.
When should you invest in utilities?
Most investors should always have a position in utilities. Utilities provide income through dividends and lowers the overall risk of a portfolio. Its best to accumulate utilities when the stock market is hot. Utilities can provide a gauge of market over-exuberance if they are significantly under-valued. During market corrections, investors typically flee to utilities. This will cause an increase demand for utilities. If this happens, its typically a good time to reduce your position in utilities and find under-valued opportunities in other sectors.
Note: these are generalizations. The behavior of the market is evolving as more algorithmic trading occurs.
What percentage of my portfolio should be utilities?
For a new investor, utilities should make up 10% to 15% of your portfolio. Ideally, an investor has a position in the utility service they use. Utilities are great for new investors because a utility is a recognizable brand with an easy-to-understand business. Utilities are also great for new investors because they provide dividend income while also having low volatility. For more information, see the Top Stock for New Investors For advanced investors, choose a percentage based on your investment strategy. Aggressive investors should keep a small position in utilities instead of holding a cash position. To learn more, read How Much Cash Should I have in my Portfolio?.
Investors looking to preserve wealth or generate income may want to hold up to 50% of their portfolio in utilities depending on current business cycle. As utilities are the more aggressive addition to a wealth preservation or income generating portfolio, its best to accumulate utilities during a market recovery and expansion while reducing exposure during a market correction.
Why are utility stocks defensive?
Screening for utility stocks
There are many great screener tools out there that can help you find the right investment. Manifest Investing is a powerful research tool for investing. For a free stock screener, you can use barchart.com to do a basic stock search.
How to research utility stocks before you invest
Most investors use utility stocks to lower the volatility of their portfolio and grow their income. Hence, the filters for a utilities stock screener will be consistent across most investors. However, after you filter down to a 10 to 20 stocks, its best to do an in-depth analysis of the utility. Your analysis checks that the company will continue to meet your qualifications in the future. For example, a poorly managed utility may stop paying dividends if they are losing money. Your stock filter is only finding companies who paid a dividend last quarter. Your analysis is looking to see if they will pay that dividend for the next 5 years.
Finding Utilities for Income
Below we explain why the screen ranges were chosen and what additional research you must conduct before choosing to invest in a utility stock.
Annual Dividend Yield Percentage
What are utility stocks all about? They’re all about the dividends of course! A utility stock screen should look for:
Utility stocks with a low dividend are typically small-cap utilities which are focused on growth. They will be more volatile and more useful in a growth-oriented portfolio. The utility may also be in trouble. A utility in duress will cut its dividend to conserve money. These utilities will have a strong drawdown before price stabilization occurs again.
High Yield Utility Stocks
When looking for the best utility stocks, new investors may get too concerned over dividend yield. A few tips for new investors researching utility stocks for high yield.
1.) The Actual Dividend Amount in Dollars per Share is Irrelevant
Do not ever take this into consideration. This amount is set by the company’s board based on the company’s dividend policy. However, for an investor, you are concerned about the dividend amount versus how much you must pay for the stock.
2.) A Dividend Yield Percentage is Historical by it Nature
A dividend yield percentage is your baseline to determine how good a stock’s dividend yield is. But remember, a stock’s dividend yield is always historical. This is the yield you will get if you buy the stock at that moment and the board agrees to continue to pay that amount. The board has no obligation to pay a dividend and the price can significantly change in the future.
3.) High Yields are Suspicious
When a dividend yield exceeds 5%, you need to learn more as to why this yield is so high. If the company is paying out too much of its earnings in dividends, then there is a risk that the company will be unable to pay that dividend out in the future as they are not spending enough to maintain and grow the business. If future earnings look to be faltering, investors may be fleeing the stock as they suspect the stock price will go down, regardless of the yield. This means that your high yields may be eroded by a fall in the stock’s price.
Dividend Policy and Dividend Payout ratio
A dividend policy is guidance given by the company’s board of directors and Executive on how dividends are distributed. A policy ensures investors that the company takes prudent steps to make sure high dividends are paid without crippling the company. Low dividends and a crippled company are two extremes that investor do not want. A company that does not follow their dividend policy may lose the trust of investors.
Low P/E ratios
New investors should look for a utility stocks with a P/E ratio of 6 to 25. If the ratio is too low, then investors may be forecasting future problems with the company’s earnings. If the ratio is too high, then investors are either speculating that company’s earnings will grow rapidly, or investors are using the stock as volatility hedge. Both prospects means the company’s price makes it too risky for an income or wealth generation focused strategy.
Regulated vs. non-regulated utilities
In general, non-regulated utilities may have multiple sources for the vital resource they are providing[1]. For example, a non-regulated electric utility could get electricity from multiple companies. In non-regulated utilities, power generation, transmission, and distribution are monopolized by a single utility.
Different utilities will have different business plans based on regulation and non-regulation. Knowing which type a utility is will help understand the company’s competition, stability, and regulatory environment.
Stock Volatility - Are Utilities Really Safe?
Stock volatility can be measured in many ways, but for our analysis we measure the standard deviation of a stock’s price change over a 5-year period. A higher standard deviation means larger price swings. Investors in the company may be unsure of the company’s future and that insecurity will translate into higher price swings and speculation.
Stock volatility was a variable used to determine the top electric company stocks and the top water company stocks. The other variable used in our analysis that may not be in a stock screener is max drawdown. This is the largest price fall a stock incurred from a local high price to a local low price. Max drawdown isn’t always in stock screeners, but we use it in our analysis as its important to know a worse case scenario loss could be when by a utility stock. Even utility stocks in our analysis saw a 30% to 50% drawdown in the last 5 years.
Utility stocks act as a volatility dampener for your portfolio. Because of this, utilities are defensive stocks and are historically the most defensive sector in the stock market. But to say utilities are safe stocks is an assumption we should address. Utilities had a 35% drawdown in the last five years. Nonetheless, these utilities mostly recovered. Utilities can be volatile, but they are more defensive than other stock sectors. For the most part, they will recover losses so are typically safe investment.
Utility Portfolio Diversity
Another variable some stock screeners do not have is how many States a utility conducts business in and how many customers a utility has. When a utility has a large customer base, its likely that they are in multiple regions and hence will not get completely shutdown by weather events. By conducting business in multiple states, the utility can diversify their risk to different state regulations[2].
Company Quality
After you’ve found a list of utility stocks you’ve screened for, you must now analyze the utilities. One of the best things to do is see if it made our top utility stock picks list. Our list is algorithmically generated from thousands of user’s giving their insight. Our algorithms take into account the consistency and performance of the analysts while also taking into account variables used in the screeners. Our algorithms also scans these analysis for depth and thoroughness. Theses are great reads to ensure your screened utilities are backed by a thorough qualitative analysis.
References