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Utility Stocks to Keep the Lights On


Strategists tells us which ETF makes the most sense for the sector.

Sure, it's big and boring. But it's also the sector that investment gurus think remains an attractive place for stock-pickers to commit capital: utilities.

Celebrated market pundits have recently touted the benefits of this space. They like utility companies for two reasons: Their earnings growth should mimic the US economy as they always have, and they offer meaty dividend yields for income-hungry investors.

So reasons Bill Gross. In his latest commentary, the soft-spoken bond guru urged readers to buy utilities.

He wrote: "As banks, auto companies and other corporate models become more regulated and therefore more like utilities and less like Boardwalk and Park Place, they will return less," he said, adding, "If that's the case, I figure, why not just buy utilities if that's what the future American capitalistic model is likely to resemble."

This is pretty cynical stuff, but it also makes investment sense. Gross pointed out that, price-wise, utilities are only halfway between their 2007 peaks and 2008 lows -- 25% off the top, 25% from the bottom.

Most importantly, he noted, they yield 5-6%, not the .01% available today for money market funds.

Gluskin Sheff's David Rosenberg recently pointed out in a research note that utilities have also enjoyed much "growthier" returns than growth sectors themselves, with total returns of 37% over the past decade versus nearly -10% for the market as a whole.

In addition to Gross and Rosenberg, another fan of utilities is the greatest value investor of our time: Warren Buffett.

As the Financial Times points out, the billionaire's pending buyout of railroad Burlington Northern Santa Fe (BNI), on top of other regulated pipeline and electric utility investments, signals that we have entered a low-return world.

"Unless regulators are unreasonable, owning an indispensable natural monopoly is a way to get a return at least in line with an economy's nominal growth rate plus a small premium," the Financial Times notes. "This would pale in comparison with Berkshire Hathaway's (BRK.A) historical returns, but perhaps now is no time for investors to be greedy. If the Oracle of Omaha is aiming low, the pickings must be slim indeed."

Investors that want to put money to work in the utility group can use exchange-traded funds. But which one makes the best sense? We checked in with Morningstar ETF strategist Paul Justice to help us sort through the options.
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No positions in stocks mentioned.
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