Utility fund as a replacement of portion of fixed income

[Cpadave]

What is your thoughts on replacing part of fixed income allocation with a utility fund? Historically it has had a better return the bonds with some degree of safety. I realize they have more risk, but in long term would they offer a better risk return than bonds?

The same question for Reits as an option for the portion of fixed income.

[ncbill]

IIRC REIT valuations were hammered last year during the huge run-up in growth stocks.

[Cpadave]

Yes, REIT are more volatile and have more risk than bond . In general I am talking about long term performance (30+yrs). I would think utilities have less risk since they are regulated.

[OldShooter]

So ... the fixed income portion of your portfolio is the "safe" part, right? Then why are you seeking volatility and risk in that portion? (Risk is imply the other side of the yield coin. One comes with the other.)

If you really want more volatility and risk, just increase the equity side a few %.

We all have this greedy urge when we look at the low yields of the safe stuff, but IMO it really is an illogical thing to do.

[GrayHare]

Both bonds and utilities produce regular interest / dividends. Unlike bonds, historically utilities also provide modest growth in share price that more or less tracks inflation.

Looking forward, conventional electric utilities face possible disruption from alternative energy sources.

[OldShooter]

Quote:

Originally Posted by GrayHare ... Looking forward, conventional electric utilities face possible disruption from alternative energy sources.

Actually the disruption is certain and is already starting to happen. This may be the riskiest time ever for the traditional public/private utility paradigm.

Solar and wind produce electricity at essentially no variable cost, leaving conventional plants needed only to pick up slack and when the wind is calm and the sun is not shining. No one will buy from a conventional plant when "free" energy is available. Thus the cost of maintaining and running these plants will have to be borne on a smaller and smaller number of kilowatt hours or a completely different public/private relationship will have to be forged. A modified scenario is that energy storage will become economically feasible and conventional plants will be needed even less. A little reading will find this subject to be well-covered. IIRC Germany is in the lead in trying to figure out how to deal with it.

We could also talk about the scenario where the "grid" is owned and operated as a separate entity from power generation companies and how disruptive that would be.

[sengsational]

Or just pick a couple and buy the stock. DUK, SO? It's not against the law to just pick a few well-respected stocks.

[njhowie]

I get very uneasy when folks say they will use some investment/allocation as a proxy for some other...generally it comes back to a proxy for cash or fixed income - because as we all know the yields have been almost non-existent for quite a while.

However, my view is that if you want an allocation of something, buy the something, because it is the only thing which will act as it does. If you go and choose something else which you believe will provide better yield/return, well there is a reason for the higher yield or return - its called risk.

Now, some folks may be perfectly fine taking some additional risk for owning the proxy investment. However, do not try to justify to yourself that it's simply a swap where you are going to make out better for no additional risk. There is additional risk. More times than not, if the investor would take a step back and objectively consider how much additional return he/she would likely get, they would quickly reach the conclusion that it's really not worth the risk.

[lwp2017]

Quote:

Originally Posted by OldShooter Actually the disruption is certain and is already starting to happen. This may be the riskiest time ever for the traditional public/private utility paradigm. Solar and wind produce electricity at essentially no variable cost, leaving conventional plants needed only to pick up slack and when the wind is calm and the sun is not shining. No one will buy from a conventional plant when "free" energy is available.

Solar and wind are heavily subsidized and are unprofitable on their own. Renewables receive a $23/megawatt subsidy and also 1/3 of capital costs.
Production tax credits have to be renewed in 2019, that is when they expire- risky to assume fed govt will automatically renew any tax policy.

There will always be a demand for traditional sources due to unpredictability of wind and solar output. Capability factor of renewables is less than 37%, compared to nuclear at 92%.

Only real long term change to conventional generation and distribution will be if ( when) we figure out how to store power at the multi-gigawatt level for weeks at a time.

Until then, USA consumers and industrial customers expect power to flow upon demand, even when the wind is still and the sky is cloudy.

https://www.eia.gov/electricity/mont...?t=epmt_6_07_b

https://energy.gov/savings/renewable...tax-credit-ptc



No energy source is free.

[alaska55]

Quote:

Originally Posted by OldShooter Actually the disruption is certain and is already starting to happen. This may be the riskiest time ever for the traditional public/private utility paradigm. Solar and wind produce electricity at essentially no variable cost, leaving conventional plants needed only to pick up slack and when the wind is calm and the sun is not shining. No one will buy from a conventional plant when "free" energy is available. Thus the cost of maintaining and running these plants will have to be borne on a smaller and smaller number of kilowatt hours or a completely different public/private relationship will have to be forged. A modified scenario is that energy storage will become economically feasible and conventional plants will be needed even less. A little reading will find this subject to be well-covered. IIRC Germany is in the lead in trying to figure out how to deal with it. We could also talk about the scenario where the "grid" is owned and operated as a separate entity from power generation companies and how disruptive that would be.

Well at least you are half right, one day solar will supply a high % of energy in some parts of the world. Wind energy is nothing but a folly, if you don't believe me investigate for yourself.

[NW-Bound]

I like solar energy a lot, but the problem is storage. A while back, I shared a chart showing days where Germany's solar and wind power production was near zero. That means they would need almost 100% thermal plant capacity for back up.

Don't know how that would impact utility dividend in the US. Are German utility companies like the US counterparts? If so, what's the effect so far on their dividends?

[DrRoy]

Quote:

Originally Posted by Cpadave What is your thoughts on replacing part of fixed income allocation with a utility fund? Historically it has had a better return the bonds with some degree of safety. I realize they have more risk, but in long term would they offer a better risk return than bonds? The same question for Reits as an option for the portion of fixed income.

Just be aware that in a rising interest rate environment like we have had over the last several months, these equity income vehicles will lose value. The utility ETF's XLU (utilities) and IYR(real estate) lost over 10% in that period. The chart shows the last 6 months.

[DEC-1982]

How did utilities and bonds do during the 2007-2009 recession? That would give you some idea of the risk factor.

[njhowie]

Quote:

Originally Posted by DEC-1982 How did utilities and bonds do during the 2007-2009 recession? That would give you some idea of the risk factor.

2007-2009 we had falling interest rates. Today we have rising interest rates.

[Winemaker]

I just sold my half of my BUI at a profit, but not as high as it was a year ago. Just raising some cash.

As a coal biased observer, on a trip to Wyoming, thousands of windmills are operating, supplying mandated renewable power to Kalifornia at upwards of +30 cents/kwh. Local coal fired power was at 4 cents/kwh and here in SW PA, I pay 6.95 cents/KWH, using natty gas and coal.

[gerntz]

I understand that a lot of wind energy sources are being installed by utilities. Maybe solar too. If true, those companies aren't going anywhere.

[OldShooter]

Hmmm ... I guess I wasn't as clear as I thought in Post #6. Let me try again:

I am talking strictly about the variable cost of power generation. By definition this does not include any consideration of fixed costs, amortization, capital subsidies, etc. If you think about it I think you can see that the variable cost of conventional power is inevitably higher than the variable cost of solar and wind. Fuel to run boilers and turbines is the obvious difference, but I'm pretty sure that the variable maintenance expense per kwh is much higher for conventional plants as well.

So what happens in the big picture? For both political and economic reasons, demand for power will be preferentially served by cheaper solar and wind, leaving conventional plants a smaller and declining piece of the pie. Energy storage technology, to the extent it comes on board, just accelerates this.

(Re Germany needing 100% conventional backup, that is really part of the point. Idle backup capacity is costly to maintain, costs that will be hard to recover on the kwh actually sold.)

According to the regulated monopoly paradigm, shareholders of conventional utilities are entitled to cover their costs and get a return on their investments. So now the huge capital investment in conventional plants must be recovered on a declining number of kwh, setting up a near-endless battle between rate-payers, Public Utility Commissions, and utility companies. The fact that in some cases the utilities also own the solar and wind facilities just thickens the soup. The real zealots for renewables want power generation to be separately owned, which is another aspect of the battle.

So ... I certainly don't know how this is going to come out but I will argue that there is significant risk here for the regulated monopoly paradigm and, hence, shareholders. When the politicians on the public utility commissions get squeezed between the rate payers and the utilities it is never good for the utilities. Ergo, I'd not be lookin' at those dividends as an endless stream of cash. Search "Taleb's turkey" --his little parable might be applicable here.

(None of this is original with me. You can read about this issue in renewable energy discussions any time in the past few years. Another, closely related issue is "Who should own the grid?")

[Chuckanut]

Quote:

Originally Posted by NW-Bound I like solar energy a lot, but the problem is storage. A while back, I shared a chart showing days where Germany's solar and wind power production was near zero. That means they would need almost 100% thermal plant capacity for back up.

No problem. They just buy more electricity from the French who produce it using nuclear power - which the Germans don't approve of.

In Turkey I saw a solar water heater on just about every building. (One soon learns to take the shower late in the after noon when there is plenyy of hot water, not first thing in the morning when warm water is all that is available.) One hotel I stayed at must have had at least 3 dozen of the water heaters on its roof. (Yes, they still have a water heater for the times when the sun don't shine.)

But, I can't remember seeing very many solar cells on those same buildings. Perhaps solar water heating is the way to start as it seems to work very well in hot sunny climates.

[sengsational]

Quote:

Originally Posted by DEC-1982 How did utilities and bonds do during the 2007-2009 recession? That would give you some idea of the risk factor.

This was covered at length in a dividends vs total return "discussion". If you look at the utilities funds, they were nothing to write home about, but my individual utility stocks during that period did much better than most.

[Hermit]

When my dad was in his 70s, Fast Eddie talked him in to investing in phone company stocks (US West). It had been a great performer since the Bell breakup. That "safe" utility went down and never recovered in Dad's lifetime. That was Dad's first and last foray into the stock market. Disruptive technologies can have a real impact on utilities. Diversify is always a good idea.