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Sep 30, 2020

Why The Utilities Sector Is Essential to The Economy

By Team Stash
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What is the utilities sector?

Practically every day, you use water to take a shower and electricity to power your home.

These activities rely upon the utilities sector, which includes companies that supply water, produce natural gas and electricity, process sewage, and more. Utilities are critical to the economy, providing the vital infrastructure that ensures you have light, heat,  clean water, and proper sanitation when you need it. Many of us take these things for granted every day. 

The sector includes companies that distribute water, gas, and electricity through farflung networks to consumers. (Telecommunications and broadband internet services are sometimes lumped together with utilities, but they’re not officially part of the sector.) With a market value of $849 billion, the utilities sector employs more than 960,000 U.S. workers, and includes 99,699 different companies.

Although the three biggest companies in this sector are energy companies, the sector includes more than that. Here’s a look at some of the biggest players below. 

  • NextEra Energy, which has a market capitalization of $135.8 billion
  • The $69.6 billion Duke Energy
  • And Dominion Energy, with a value of $67.1 billion. Berkshire Hathaway, which is owned by Warren Buffett, acquired the natural gas portion of Dominion Energy in July, 2020 for $10 million.

Energy companies can produce energy using different types of resources, such as natural gas, nuclear energy, coal energy, solar power, wind power, and hydropower so that consumers can heat their homes and turn on the lights. But some companies solely provide electricity. American Electric, which has a market capitalization of $40 billion, is the biggest example of this kind of utility. 

Companies in water utilities ensure people can access clean water. Additionally, sewage companies use water systems to take care of waste. The three biggest publicly traded water utilities in the U.S. are: 

  • American Water Works, with a market capitalization of $25.9 billion.
  • Aqua America, Inc., with a market capitalization of $8.4 billion. 
  • American States Water Company, with a market capitalization of $2.7 billion. 

Why people invest in the utilities sector

Utilities are what’s known as defensive stocks. Defensive stocks don’t necessarily respond to volatility in the stock market in the same way that many other stocks may because they provide staples that people likely need no matter what the economy looks like. Utility stocks are considered defensive stocks because no matter what’s going on in the economy, people typically need to cook their meals, take showers, and use their phones. 

Good to know: Defensive stocks are the opposite of cyclical stocks. Cyclical stocks drive the economy and can move more according to market fluctuations. When the economy is up, people have more “discretionary income”, or money they can spend on wants instead of just on needs. This often drives cyclical stocks up. When the economy is down, people spend less on their wants, which can drive those same stocks down. Some examples of cyclical stocks include shares in airlines, hotels, and furniture sellers.

In the most recent market downturn when the Covid-19 pandemic hit the U.S. in March, 2020, the S&P 500 Global BMI decreased 14.3% while S&P Global BMI Utilities beat the S&P 500 BMI by 2.4%. This same trend showed up in the 2008 recession, and in the 1998 and 2000 bear markets, with utilities returning an average 15% during the four worst economic periods, including the most recent one related to the pandemic.

Investors don’t just choose stocks in the utilities sector because of their defensive nature. Investments in utilities can result in higher dividends for investors. Remember that a dividend is a portion of a company’s earnings paid out to shareholders. The dividend yield of a company is calculated by dividing the company’s total annual dividend payment by its share price. The dividend yield of the utilities sector is reportedly higher than any other sector, at 3.6%

How the utilities sector is regulated

Utility companies provide essential services such as water, electricity, and natural gas to consumers. For that reason, utilities services are often a partnership between the private sector and the public sector. The government regulates utilities in order to maintain fair prices for consumers.

Here’s what regulation in the utilities sector looks like: Instead of private companies offering different prices for the service and transmission utilities, one utility company provides what different companies produce.

The government agency that oversees energy utilities is called the Federal Energy Regulatory Commission (FERC).  FERC enforces the laws and regulation governing utility companies,  and approves projects, mergers, and partnerships within the sector. Additionally, the commission monitors interstate commerce involving utility products like energy and gas, and investigates when it needs to. 

Numerous federal agencies regulate water utilities, including the Environmental Protection Agency.

A big point of contention within the sector has been deregulation. Over the course of decades, some companies and politicians have campaigned for an easing of regulations on the sector. Proponents of deregulation say that regulation actually doesn’t benefit consumers and that letting supply and demand dictate prices would mean fairer prices for consumers. 

One example is the now-defunct energy company Enron. The company lobbied to deregulate energy markets from Texas to California. Enron’s activity led to price gouging, which is the practice of hiking up prices during a crisis, severe energy shortages, and one of the biggest corporate malfeasance scandals in history.

Investing in utilities 

You can buy single stocks or exchange-traded funds (ETFs) in the utilities sector. A single stock is just that, a share of ownership of a company. Stash offers single stocks in this sector, including shares in NextEra Energy, Dominion Energy, and Duke Energy.

Alternatively, you can invest in ETFs, which are baskets of stocks, bonds, or a mixture of the two. ETFs provide investors with a way to diversify their holdings with one purchase. Stash offers ETFs in the utilities sector including High Voltage, Clean & Green, and Water the World.1

Want to invest in the utilities sector? You can start on Stash with any dollar amount.

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Written by

Team Stash

1Before investing in any exchange-traded fund, consider your investment objectives, risks, charges, and expenses.
Not all stocks pay out dividends, and there is no guarantee that dividends will be paid each year.
For Securities priced over $1,000, purchase of fractional shares starts at $0.05.

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