Why Utilities?
It has long been one of the basic plays of anyone interested in investment opportunities to invest in an essential product. While it would be folly to make a sweeping statement such as “it is impossible to go wrong,” there is no question that investing in a utility or energy provider is a reasonably safe bet when it comes to seeking a return.
One reason why utility companies are so attractive is that they are low risk while almost always providing a decent return. In terms of risk against reward, utilities is perhaps the area where the reward is most lucrative in relation to the modest degree of risk. These businesses continue performing in uncertain times both due to their supply of an essential product as well as the continued investment stream from groups moving their liabilities from more volatile companies and markets.
The bottom line, which ultimately investors are interested in, is attractive, too, with utilities generally offering the best yields across any market, typically around the 7% mark.
Which Utilities?
Perhaps surprisingly, the best utility to look to put capital in is probably water. One of the main reasons for this is that several of the larger water companies almost completely own the water network, but in effect contract out areas to smaller companies, selling the water supply at a small discount and thus increasing their own revenues quite considerably.
Water prices have also been hiked up ridiculously from the perspective of the consumer, far beyond even the cost of which it takes to supply increased water levels. What is bad news for consumers can be good news for investors, however, and water should be a definite investment consideration for anyone looking for a steady, long-term yield.
Is it Fair?
We have to be honest and say that it probably is not right that there are millions of homes struggling to make ends meet while investors are able to cash in. One of the main reasons utility companies are enjoying such large profits even in troubled times is that, when the wholesale price increases, they build this into their own tariffs, however when the price comes down again they pass on perhaps only half of this, if that, to their consumer base.
It is this factor that saves energy companies from a lot of scrutiny, especially as many of the facts about cost go unreported or ignored by many people. While consumers may struggle, the way the utility providers operate mean they are a lucrative business for private equity investors.
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