Utility companies provide a variety of services such as electricity, gas, water and sewage. They are also heavily regulated by public authorities.
Utilities offer investors a steady source of predictable investment returns from dividends paid to shareholders. They also provide lower volatility and less interest rate risk than other sectors.
They provide electricity and gas
A utility company provides electricity and gas to homes and businesses. They also maintain the pipes, wires and poles that transport energy to your home.
In regulated states, utilities also generate (or buy) the energy they deliver to your home. Public utility commissions approve rates and other charges for residential and business energy users.
Under energy deregulation, utility companies no longer have a monopoly over supply and delivery of electricity and gas in their service territories. Customers can choose to stick with their utility – or choose a competing energy supplier that offers more tailored plans, prices and customer service.
Utility stocks typically offer investors stable and consistent dividends, coupled with less price volatility relative to the overall equity markets. However, these stocks can fall out of favor with the market when there are significant economic downturns or recessions.
They charge customers for their services
A utility company sends you a bill at the end of the month based on how much gas, water or electricity you use. You can pay that bill by making a payment online, via a mail-in check or by paying with a prepaid debit card.
Utilities can charge customers a fee for every transaction they make through their billing systems, whether that’s with a credit or debit card. They call this a convenience fee.
Consumer advocates have long pushed for utilities to eliminate convenience fees, arguing they burden low-income people and are an unfair way to penalize customers who frequently pay their bills with prepaid debit cards.
A recent survey by Edmunds GovTech found that most utilities still charge convenience fees. But some utilities have taken steps to eliminate them. For example, the Modesto irrigation district in California stopped using Western Union’s SpeedPay as a third-party payment processor about 10 years ago and dropped its per-payment convenience fee.
They offer investment opportunities
Utilities offer a variety of investment opportunities, including dividends and stock growth. They are often considered defensive investments because they are essential and have limited competition.
They are also a popular long-term buy-and-hold option because they usually provide a steady stream of income for shareholders. This income is generally taxed at a lower rate than earned income, which can compound wealth more quickly.
The utility sector is particularly suited to investors interested in the global transition away from fossil fuels and toward cleaner-burning alternatives. The US and countries worldwide are currently moving toward a carbon-neutral economy, which will provide new sources of revenue for utilities.
However, the sector is highly regulated and can be vulnerable to changes in government policy that affect its profits and dividends. For this reason, investors should look for companies with conservative leverage metrics, such as a debt-to-EBITDA ratio less than 4.5 times and a debt-to-total capital value of less than 60%.
They offer customer service
Utilities offer a wide range of services, including electricity and gas delivery. They also provide customer service and billing.
Whether a utility company is regulated or deregulated, customer satisfaction is key to its success and reputation. Regulators, consumer groups and industry peers expect utilities to demonstrate that they deliver excellent service.
Customers want to engage with utilities on their terms and through the channels they choose, whether that be online chats, social media, email or a combination of these. It’s critical that utilities provide a consistent and high-quality experience to their customers across all digital channels.
While most utilities have a good customer experience, they still face many challenges. For example, they often run on a patchwork of legacy systems and struggle to provide real-time information to field crews. This results in broad service windows, vague status updates and a general lack of operational information for customers.