The conventional wisdom on utility stocks is that they are a good, safe bet given their relative monopoly status. Specifically, they are considered good bets in bad economic times due to their vaunted stability. Everyone has to pay the local electric monopoly and therefore, owning stock in them can often be a safe play.
The primary benefit to owning a utility stock, such as a gas, electric or telephone company, is that these services will always be in demand. In general, these public monopolies have a privileged position in the economy that protects them from bankruptcy or, at least, liquidation. During a recession or worse, money flows to utilities for this reason. Therefore, at least in the past, these stocks did well because of their reputation for stability.
The concept of money flowing to utilities during times of economic uncertainty seems to not hold true in 2011. The “Journal of Business and Economic research” in 2009 strongly suggested that this is “old school” investing that is antiquated in our high-technology times. It might be the case that the reputation of utility stocks is tarnishing, and they are not the safe bets they once were.
The “Investor Place” website ran an article in 2010 by the editor of the “Blue Chip Growth” journal, Louis Navellier, listing the top-10 formerly high-yielding utility stocks that quickly lost large amounts of value. Stocks in these 10 companies, including Entergy of New Orleans and FirstEnergy of Akron, plummeted as much as 40 percent or more.
An important disadvantage of owning utility stocks is the constant threat of privatization or Post Office style semi-privatization that was unthinkable 50 years ago. Budgets are tight, and the old sacred cows of the utility firms might be sold off, at least in limited quantities, to raise cash for state coffers. If this is true, or is even just considered to be true, this can spell the end of the special status of utility investments.
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