Ideal Candidates For Retirement Investing, Right?
With the stock market extended and recently having experienced some renewed
volatility, you may have seen calls to move into "safe" utility stocks. It
is common to see utilities described as they were in a June 2014 InvestorPlace article:
Utilities are often a go-to asset class for those in retirement, as the
sector provides plenty of big income opportunities. After all, consumers,
businesses and municipalities still need to power their operations and
cool their homes, even in tough economic times. Water still needs to flow
and electricity hums through power lines. Ultimately, utilities' stable
cash flows and recession-resistant nature make them ideal candidates for
investing during retirement.
While utilities do have real world advantages during a recession over more
economically-sensitive businesses, that does not necessarily mean utility stocks
will perform well during a recession/bear market. Therefore, it is prudent
to ask:
Did utility stocks help investors protect their wealth during the
2008 financial crisis?
You can decide. The table below shows the bear market (2007-2009) performance
of numerous utility stocks that are often paired with the terms defensive,
stable, and conservative.
Steady Dividend Does Not Mean Safe Stock
A recent Kiplinger's article
described utilities this way:
For steady, albeit modest, growth and above-average dividend yields,
it's still hard to top utilities.
Investors should not confuse the benefits of a "steady" dividend with a low-risk
investment. It is true utilities tend to produce a stable source of income.
However, what good is Northeast Utilities 3.40% annual dividend if the investor
loses 30% in a bear market? Dividends are only a small part of total return,
especially during bear markets/recessions.
How Would A 30% Loss Impact Your Portfolio?
Since portfolio values have greater meaning than percentages, the table below
shows what our portfolios would be worth if we invested equal amounts into
the 18 utility stocks shown above that lost an average of 30.08% during the
2007-2009 bear market. Since the share prices used in this analysis are adjusted
for dividends, the figures below account for income payments, which shows dividends
will not save an investor in a bear market.
More on prices that are adjusted for dividends From Yahoo
Finance:
Adjusted Close provides the closing price for the requested day, week,
or month, adjusted for all applicable splits and dividend distributions.
Data is adjusted using appropriate split and dividend multipliers, adhering
to Center for Research in Security Prices (CRSP) standards.
Investopedia expands
on the benefit of using adjusted closing prices, as we did in this analysis:
The adjusted closing price is a useful tool when examining historical
returns because it gives analysts an accurate representation of the firm's
equity value beyond the simple market price. It accounts for all corporate
actions such as stock splits, dividends/distributions and rights offerings.
Investment Implications - Contingency Plans Needed
Should investors ignore the potential benefits of investing in utilities?
No, but they should also understand the real world risks associated with any
buy-and-hold-and-hope investment strategy. Many investment systems focus on
favorable entry points, but provide little or no guidance for when to prudently
reduce risk. Utilities may turn out to be fine investments over the next five
years, but the same thing could have been said in October 2007 just before
they plunged 30%. While you may have been told there was nothing investors
could do in 2008, there were a number of ways to mitigate (not eliminate) investment
risk during the financial crisis. While there is no perfect method or magic
bullet, this 2008
video describes the concepts of paying attention and adjusting rather than
hoping and praying.
