Investing in utilities stocks
This heavily regulated sector is fairly low risk — but growth is limited.
Utilities stocks offer some of the most stable and reliable investment opportunities on the market. But government regulations may limit revenue and growth potential. Here's what you need to know about investing in utilities stocks in Australia.
What are utilities stocks?
Utilities stocks belong to companies within the utilities sector of the stock market. According to the Global Industry Classification Standard, there are 11 stock market sectors, each defined by a specific industry or type of business. Stock sectors help investors gauge or invest in select pieces of the market.
The utilities sector is comprised of companies responsible for basic public services and amenities, including water, gas and electricity. As a result of the public-facing nature of the sector, it’s one of the most heavily regulated, contributing to stable dividends and decreased volatility.
What subcategories does it include?
Companies within the utilities sector can be publicly or privately owned and break down into the following subindustries:
- Electric. Companies that create or provide electricity for commercial and residential homes belong to this subindustry.
- Gas. Unlike companies that produce gas from the energy sector, gas utilities distribute manufactured and natural gas to businesses and households.
- Water. Companies are responsible for buying and distributing water, including water treatment facilities.
- Multiutility. These companies provide more than one utility, combining gas, water, electricity or other services in their public offerings.
- Renewable energy. Independent power producers and renewable electricity providers fall into this category, including solar, wind, geothermal and hydropower energy providers.
How to invest in the utilities sector
While it’s not possible to directly invest in a stock sector, you can invest in what the sector tracks by purchasing stocks and exchange-traded funds (ETFs).
Individual stocks let Australian investors target the specific companies they want to back. Stocks can offer high-yield returns but tend to be more volatile than ETFs.
ETFs track the entire sector and offer more comprehensive portfolio exposure. But they come with expense ratios — typically in the 0.03% to 2.5% range.
To purchase stocks or ETFs in Australia, you’ll need a brokerage account. Here’s a quick breakdown of the investment process:
- Pick a platform. Explore your platform options to find the broker best suited to your investment goals.
- Open an account. Complete applications for web-based brokerages online with just a few pieces of personal information.
- Fund your account. Transfer money to your new brokerage account to begin trading.
- Select your securities. Use your platform’s research tools or rely on third-party research to find stocks and funds by sector.
- Watch your investments. Log into your brokerage account to monitor your investments.
ASX utilities stocks
There are more than 20 utilities stocks that trade on the Australian Securities Exchange, including energy giants like Origin Energy, Mercury NZ, AGL Energy, APA Group and Meridian Energy.
What ETFs track the utilities sector?
The S&P/ASX 200 Utilities index (ASX: XUJ) tracks the Australian utilities sector. It is up 8.96% so far in 2024 (last updated 15 October 2024).
How is the utilities sector performing?
The graph below tracks the Utilities Select Sector SPDR Fund ETF (XLU). Tracking ETF performance is one way to gauge how a sector is performing.
Why invest in the utilities sector?
One of the major draws to the utilities sector is stability. Companies in this sector typically pay steady dividends investors can rely on. The utilities sector is one of the least volatile on the market and is especially well-positioned to weather recession. Gas, water and electric companies tend to do well during an economic downturn, so stocks in this sector are a prudent choice for Australian investors executing a long-term buy and hold strategy.
What unique risks does the utilities sector face?
Due to the government regulations that hold significant sway over this sector, it’s difficult for utilities providers to increase their revenue through raised rates. And due to the sizable infrastructure required to operate, utilities providers are often forced to carry a lot of debt, making them especially vulnerable to interest rate fluctuations.
Profits from investing in the utilities sector can act as a reliable source of income, but Australian investors seeking opportunities with greater growth potential would do better to explore other sectors, like technology stocks.
Compare stock trading platforms
In order to purchase stocks or ETFs, you'll need a brokerage account in Australia. Compare your options using the table below to find the right fit.
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Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Bottom line
The utilities sector houses companies responsible for basic services we need and rely on, including gas, water and electricity. Reliance on these staple services makes companies in this sector a safe and stable investment, but heavy regulations limit their revenue potential.
Review your brokerage account options across multiple trading platforms for the account best suited to your investment goals.
Frequently asked questions
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
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