“Honey, could you please turn off the lights when you leave?”
With the price of almost everything going up, that plea has probably sounded more urgent in recent days than it did before.
I know I hurt when I pay my hefty – and growing – energy bill every month. And I’m not alone.
While government data suggests wholesale power prices should decrease in 2023… The lag between what utility companies pay for energy and what they charge customers likely won’t come down anytime soon.
Duke Energy, which services my house in South Carolina, announced users could see an average $20 increase in their electricity bills early this year.
The fact of the matter is that electricity is an essential part of life. Sure, you can save a few bucks here and there by changing to energy-saving LED bulbs and energy-efficient appliances.
But at the end of the day, there’s a minimum amount of energy we need to use to maintain modern lifestyles.
And unless you happen to live in an off-the-grid house out in the middle of nowhere, chances are you’re forking over a bunch of money to your utility company every year to keep the lights on.
Worse yet, you don’t get much of a choice in the matter. You’re stuck with whichever company happens to service the area your house is in.
Utilities are legal monopolies.
That may be bad news for your wallet. But it’s a great opportunity for your investment portfolio. In fact, the first stock I ever owned – gifted to me by my great uncle when I was in middle school – was a utility: Consolidated Edison (ED).
Utilities are some of the most reliable dividend payers you can find. And here at Intelligent Income Daily, we’re focused on finding the safest income investments to boost your bottom line.
Today, I’ll explain how utilities make money, why they’ll continue to grow for many years to come, and give you the name of a quick way to start investing in them.
How Utilities Make Money
You may think utilities make money by selling electricity. But actually, that’s not how it really works.
Utilities make money by building things. Things like power plants and transmission lines and electrical substations. Things like the grid of power lines and transformers that bring electricity to your home in a usable form.
Remember how utilities are legal monopolies? Well, that special status comes with a lot of regulation about what they can and cannot do.
While you may think utilities charge whatever rate they want for electricity, the reality is that regulators control how much a utility earns by deciding on a number called the allowed return on equity. In most states, this number is between 8 to 10 percent. In order to earn more money, the utility has to build more assets.
When a utility builds a new power plant for example, it gets added to what is called the “rate base.” That’s the value of the regulator-approved assets that the utility owns and can make money off of. Most of the time, utilities will finance new projects with a mix of debt and selling new shares to investors. The allowed return on equity dictates how much investors will earn.
So when the price of fuel spikes, or inflation increases wages, the utility passes the cost on to customers and investors still earn the same return on equity. If the utility earns more than it should, it has to dial back rates for customers to get back to its allowed return on equity.
It’s an incredibly stable and predictable business. That allows utilities to pay reliable dividends.
Growth Opportunity for Years to Come
But, you may be wondering, if everything is so stable and regulated, how do utilities grow?
Well, as demand for electricity increases due to population or economic expansion, a utility can justify to regulators that it needs to build more assets to meet an area’s needs. That means that its rate base can increase and investors make more money.
Another factor is the push for renewable energy. That will require massive investment in new power plants and transmission lines to connect them to the grid. With the Inflation Reduction Act passed last year, there is now a huge amount of government support for clean energy and all the infrastructure needed to make it work.
That means that utilities will have plenty of stuff to build for many years to come.
One way to get started investing in utilities is through the Utilities Select Sector SPDR ETF (XLU), which invests in stocks of companies operating across utilities sectors.
So now when the lights get left on, you’ll make some money back.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
P.S. If you are looking for more in depth research and deep dives like the one above, check out the Intelligent Income Investor. In it, I recommend battle-tested stocks that provide readers a safe, reliable, and durable income stream.
That way you can sleep well at night, no matter the market conditions.