Utilities

Utilities

We turn on the water faucet every morning to brush our teeth and make our coffee. We click on the oven or the stovetop burner to cook our meals. We power up the heat when the air outside starts to chill or the AC on when the weather warms up. And then, like clockwork at the end of every month, we pay each of our utility bills. 

Most of the time, utilities don’t come with many surprises. And, while costs always seem to go up, it’s usually a little bit at a time. But you likely already know this. Utilities are just part of life. Still, it’s possible that you’ve never considered the following: what would it look like if you invested in your utility services and they paid you like clockwork, as well?

Utility investments offer a unique way to diversify a portfolio— providing stability and returns almost as predictable as your monthly bill. Here’s why you should consider a utility-related investment product before your next billing cycle.

What qualifies as ‘utilities’?

Utilities include electricity, natural gas, and water and waste services. 
American Water Works (NYSE:AWK), for example, is the largest publicly traded water and wastewater utility in the U.S. Through its subsidiaries, it services approximately 3.4 million active customers in 16 states. Over the last three years, it managed to grow its earnings per share by 9.1% per year, over three years. This past year, its revenue grew by 4.3% to US$3.6b. 

The utility sector increasingly includes wind and solar. For example, NextEra Energy (NEE), which invests in renewable energy infrastructure, has performed well overall since its market debut. 

At one-point telephone and cable companies were strictly regarded as utilities. In some cases, they still are (specifically landline services). But, improved technology and a changing, increasingly competitive market is transitioning them to part of the communications sector rather than a public utility. 

Utilities, including electricity, natural gas, and water and waste services, typically have monopolies in the geographic regions that they serve. In part this is because the cost of building and maintaining a power plant, a grid network required for distribution of electricity, etc., and the customer service infrastructure to collect payments and meet the needs of mass users is expensive. 

While the stability of no competition and a reliable customer base generally means that utilities are less impacted by economic downturns than other companies, it also means that they are regulated. 

Regulation means that a government entity at the local, regional, and/or federal level participates in oversight. Typically, oversight would include the monitoring of utility rates for customers, regional growth rates, and service reliability. It limits the ability to easily make rate increases to adjust for a profit margin, for example, requiring that price increases be both necessary and approved. 

Why invest in utilities?

Utilities are not a choice investment for making fast cash, rather they are a great way to diversify your portfolio. Considered a defensive investment, utilities can be a great tool to reduce overall risk. Utilities are generally regarded as a safe investment, more correlated with bonds than stocks, for a couple of reasons.

First, because utilities participate in a regulated industry, competition is generally stable and limited. They also rarely go out of business and because they have consistent customers who don’t have other options, they tend to have consistent revenue. 

Second, because they are regulated entities, they have very predictable cash flow and profits. This allows utilities to pay consistent dividends, generating steady income for investors. They also pay relatively high dividends (typically 60 to 80 percent of their annual earnings) to shareholders in part because they have little need to reinvest earnings into operations. The need for energy resources to power our refrigerators, water from our sinks, etc. is all consistent regardless of the strength of the economy. 

Investing in utilities that offer wind and solar opportunities can also provide a way for investors interested in environmental, social and governance to financially support companies aligned with sustainable values. 

How to invest in utilities 

Because of their infrastructure requirements, however, utilities tend to carry a lot of debt. This makes them vulnerable to rising interest rates. Higher interest rates both typically lower stock prices and increase debt for utility companies. 

There are a number of ways to invest in utilities, but it’s most often wise to look for a mutual fund, exchange-traded fund, or company with diversified holdings. Diversification limits some degree of risk in the case of a natural disaster that damages infrastructure, for example. 

However, utility-focused ETFs and mutual funds are a good way to access this sector without investing directly in individual utility providers. A search on Magnifi suggests there are a few different ways to do this.

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The information and data are as of the June 30, 2020 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.

Water

How Water Became an Investment Opportunity

In July 2010, the United Nations declared that access to safe and affordable water is a basic human right. Since that declaration, the world has made improvements towards broader access, but there is still a very long way to go.

According to a June 2019 study by UNICEF and the World Health Organization, roughly one-third of the global population does not have access to safe drinking water today. Access to safe drinking water means “drinking water from sources located on-premises, free from contamination and available when needed.” More troubling still, the study also found that roughly 785 million people worldwide lack basic water services entirely, and some 144 million are reliant on untreated surface water.

The World Economic Forum’s 2019 Global Risks Report, which annually identifies the most pressing global challenges, placed water crises among the top four risks, just behind extreme weather events, failing to prepare for climate change, and weapons of mass destruction. As the effects of climate change spread and become more pronounced, problems surrounding access to clean water are only expected to increase. According to the World Health Organization, roughly half of the world’s population will be living in water-stressed areas by 2025.

So, what are we to do with this troubling information? Throw up our hands and wait for someone else to sort it out? Innovators across the globe think not. They are looking to the future, and to technology, to develop the systems that will provide access to clean water across the globe. As they work to address one of the most pressing problems of our time, they will need capital, and lots of it.  For those interested in investing in this rapidly-growing sector, however, there are a few important points to understand.

The Trouble with Water Access

At the heart of the global water crisis is the fact that water is too scarce in some places, too abundant in others, and the water that we do have access to is often expensive to treat. It is often not feasible to move large amounts of water great distances, and techniques for capturing and cleaning water in one place will not necessarily work in another.  As such, innovators are coming up with local solutions to this global problem.

Water is often in short supply in the arid Atlas Mountains of Morocco, and climate change is driving the region into deeper and more persistent drought. After learning about fog harvesting used in other parts of the world, a Moroccan nonprofit teamed up with a German company, Aqualonis, to design and install a massive array of nets high in the mountains to harvest fog rolling in from the Atlantic Ocean. The project doubled the amount of water available to people in surrounding communities. Following the success of the Moroccan project, Aqualonis is planning several other fog catching projects across the globe.

Another striking innovation comes from Cody Friesen, founder of Zero Mass Water. He discovered a way to “pull” water from the air using solar panels, even in places where the air is quite dry. The panels have been installed in 33 countries across the globe, and they are providing clean drinking water to communities, refugee camps, and businesses. Zero Mass Water is now backed by a $1 billion fund led by Jeff Bezos and Bill Gates.

The Market Opportunity in Water

According to investment firm RobecoSAM, “Market opportunities related to the water sector are expected to reach USD 1 trillion by 2025. Companies that are early to respond and take steps to exploit the market opportunities associated with these water-related challenges are more likely to gain a competitive advantage and achieve commercial success.”

The global water crisis is not going away on its own, and climate change is only going to make the situation more dire in coming years. Investing in companies addressing the global water crisis makes financial sense because there is a growing demand for an increasingly finite resource.

The case can also be made that investing in water innovation is also a socially responsible investment. We are going to need many more innovations in the coming years to fully tackle the global water crisis, and investing now in companies already at the forefront of the fight will encourage further innovation.

How to Invest in the Future of Water

You cannot invest in water itself, of course, but you can invest in companies creating solutions to the global water crisis. For instance, the AllianzGI Global Water Fund specializes in “investing in companies offering solutions to help solve the global water challenge.”  This fund returned an annual average of 9.83 percent over the past 10 years, compared with 5.37 percent for its average Morningstar peer.  A search on Magnifi suggests that there are a number of other ways to profit from water innovation as a whole.

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Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

This blog is sponsored by Magnifi. The information and data are as of the  November 6, 2019 (publish date) unless otherwise noted and subject to change.

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.