Invest in Utility Stocks during Recession?
It is official - the National Bureau of Economic Research (NBER) declared that the U.S. has been in a recession since December 2007, making the current downturn one of the longest since the 1930's Great Depression (14 months as of February 2009).
How much longer will it go? Unfortunately, many experts state that the end of the downturn is not in sight yet. Some of them suggest that in the best case scenario the economy will hit the bottom somewhere near the second quarter of 2009.
In any event this will be the longest recession since the Great Depression, nothing like the short and remarkably mild ones over the past two decades. Thus, if you have been hoping for a quick and shallow downturn or if you have been planning an investment strategy suitable for a "normal" recession, you are most probably going to get disappointed.
So what are the best stocks to invest in during a recession like the current, "abnormal" one?
Investment Strategies during Recession
In order to fight back the negative results of the halted growth you may undertake a number of strategies. Until recently, one of the natural answers to a conservative investor's search of safe investments was the investment in utility stocks.
Utility stocks are stocks of electric, water, gas, and telephone companies. They are often called "widows-and-orphans stocks" - a term that is usually used to describe stocks with a relatively decent dividend income and high degree of safety.
Whether the economy is growing or slowing, people just need electricity, water, gas and phones, these services are an indispensable part of our lives. And when the economy turns down utilities hold up well because investors prefer to invest in companies with reliable earnings in a slow economy.
Additionally, interest rates typically fall in a recession. One of the usual actions that the Fed may undertake if a recession hits the economy is to lower the interest rates. It will do this in order to put the economy back in its well-balanced and healthy condition. As a result of a potential interest rate decrease the dividends you will get from a utility stock will be far more appealing than the money you will get if you have invested in bank CDs, bonds or some other fixed income investment solution.
Ask your grandparents and they will tell you the same - utility stocks are beneficial during difficult economic times; they provide a steady stream of income and their stock prices are rarely affected by the bad market conditions.
Investing in Utility Stocks during the Current Recession
However, the current market conditions are not the same as in the previous economic downturns. The current utilities may also not be the best investment they once were in conditions of a recession and bear market. Utility stocks are still considered to be a safe bet and some are still a great investment option but invest with caution and consider the following:
First, despite the regular investors' preference for utilities, many of the utility stocks did not get the expected dividend yields as the market's turbulence hit the sector as much as the other sectors.
Second, the utilities regulations are now different. Whereas the distribution companies are still tightly controlled monopolies, companies, which generate power from nuclear reactions, coal, and natural gas, operate in a competitive market. Their ambitious plans for expansion and borrowing led them to a surfeit of capacity when the demand for power greatly declined. Furthermore, the decline in energy prices and the demand for fuel did no good to their current situation.
Thus, as always, invest with caution. Utility stocks are comparatively strong and you can find some really beneficial investment options in this sector but do your homework first.
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