Many readers are concerned about volatility in the stock market, as well as about receiving reliably consistent interest or dividends with their investments.
Although the stock market has performed well for more than five years, there is no guarantee that it will continue to show comparable positive returns. Many analysts anticipate that returns in the near term will be much lower, perhaps even negative.
However, it is impossible to predict the best time to go in and out of the stock market. Most investors, even in retirement, should maintain a significant percentage of their portfolio in some type of common stock investment.
How can you do that and minimize risk? I believe the answer is having a diversified common stock portfolio, preferably in index funds and in conservative sectors. Lawrence Strauss wrote recently in Barron’s that utility stocks are “worth a second look,” and I agree.
From time to time I have discussed utility stocks in general and utility funds and exchange traded funds in particular. Several years ago, when Bill Gross was a co-CEO of PIMCO, he wrote an interesting recommendation for investing in utility funds. At the time he managed the bond portfolio for PIMCO, one of the largest, if not the largest bond manager of bonds in the U.S.
I would always read his monthly analysis of economic conditions, and I thought his opinions were worth reading about. It was amazing that the largest bond manager in the U.S. was recommending investing in an investment that was in direct competition with bonds.
I looked carefully at some of the alternatives for investing in utility stocks. I didn’t want to invest in individual securities, so I looked at utility mutual funds and ETFs. Eventually, I decided to invest $100,000 in a Vanguard utility mutual fund. It has been one of the best investments I could have made for a conservative portfolio.
At the time, the dividend yield was 4 percent (it is now 3.4 percent). For several years I simply re-invested the dividends back into the fund.
The annualized yield benchmarks over the last several years have been: one year, 4.80 percent; three years, 12.49 percent; five years, 10.81 percent.
Eventually, I felt that my investment in that fund was high (over $150,000) as a percentage of my total portfolio, so I started gradually to sell some of my holdings and reinvest in other conservative investments. I have withdrawn over $90,000 from my initial $100,000 investment, and the current holding after these withdrawals is currently worth approximately $129,000.
The current yield is still approximately 3.4 percent, so I see no reason to liquidate my holdings.
I still receive over $1,000 in dividends each quarter, and generally I reinvest that dividend in other conservative investments. There has never been a quarter in which I have not received a comparable dividend payment.
In his Barron’s article, Strauss indicated that, according to experts in the industry, earnings are expected to grow on average in this industry by 4 percent to 6 percent annually. He estimated that investors can expect high single digit total return in the foreseeable future.
If you’re looking for a conservative investment with earnings growth and consistent dividends, mutual funds or ETFs that specialize in the utility industry are a good choice. Select an investment with low annual expenses. For example, the annual expenses for the Vanguard Utilities Index Fund Admiral Shares (VUIAX) is 0.10 percent.
The minimum investment for that fund is $100,000.
However, Vanguard does offer ETFs in the utility industry with much lower minimums (you can purchase one share, if you like) and expense ratios of 0.10. Vanguard's expense ratios are generally much lower than the competition.
Elliot Raphaelson welcomes your questions and comments at email@example.com.