Perhaps unsurprisingly, investors are taking a close look at utilities stocks again, or should be, due to their defensive characteristics. But those focused on the sector’s defensiveness may be missing an equally compelling reason to invest: exciting growth.
Utility stocks often perform well relative to the rest of the market during downturns, and for good reason: The essential services utilities companies provide translate into stable earnings and a stable dividend. That stability is a port in the storm when other companies struggle through a recession. The relatively high dividends paid by utilities are also attractive in an environment where interest rates are low and yield is hard to find.
While those defensive characteristics still exist, we believe the sector is more than a defensive play. A multi-year tailwind from renewable energy make its growth outlook promising, explains Reaves Asset Management CEO Jay Rhame. He touched on that growth potential and the defensive growth characteristics Reaves seeks to provide in its strategies as part of a Q&A for investors. As Mr. Rhame explains, renewable energy is a decade-long tailwind for utilities:
“We believe that utility companies can deliver both earnings and dividend growth for at least the next decade. The driver is renewable energy. Costs to build solar and wind energy have fallen so dramatically that they are the cheapest forms of power available in many parts of the United States. Many companies can shut down existing coal and nuclear plants, replace them with brand new wind and solar, and save customers money.
”We believe that the industry is on the verge of a massive capital expenditure cycle that will ultimately make the grid greener and power prices stable, if not lower. Utilities earn a set return on the amount of invested capital they deploy, so when there are opportunities to invest in the current popular programs like renewable energy which also lowers customer bills, utilities can generate significant growth.”
To read more about Reaves’ strategies, including the strategic role they provide within an equity portfolio and the firm’s unique focus on “essential service” investing, download the full Q&A.