According to the Global Industry Classification Standard, there are 11 sectors that publicly traded stocks fall into. Among the main sectors, utilities is one of them.
The utilities sector comprises company stocks for several utilities services, including water, electricity, sewage, natural gas, and dams. As of December 2021, this large sector has a $1.59 trillion capitalization and is critical to the infrastructure of our daily lives. Every time you take a shower, turn on a light, or adjust your thermostat, your life is made easier thanks to companies within the utilities sector.
In this article, you’ll learn everything you need to know about the utilities sector, helping you to make smarter investment choices.
Investing in all of the U.S. sectors is a key strategy to building wealth. To do this, you’ll need to understand more about each sector, how each one works, and the top companies to keep an eye on.
Definition and Examples of Utilities Sector Stocks
The utilities sector is a category of stocks consisting of private companies that provide basic amenities, including natural gas, electricity, and water. While the majority of the companies included are private, they are part of the public-service landscape. Because of this, the sector is heavily regulated, both on a state and federal level.
Utility sector stocks are shares in companies within the utility sector. Dominion Energy Inc (D), for example, is one of the top 10 constituents or one of the largest stocks within the sector. A few other firms that are part of the Dow Jones utility index are Southern Co (SO), Exelon Corp (EXC), and American Electric Power (AEC).
To be included in the utilities sector, a company must have an unadjusted market cap of $13.1 billion or greater, according to the S&P Dow Jones Indices.
How Does the Utilities Sector Work?
The utilities sector tracks companies’ performance within the utility industry. While most utility companies are regulated government entities, others are unregulated and contractually guaranteed entities.
As of September 2019, there are just under 550,000 jobs stemming from the utilities sector. And according to the U.S. Bureau of Labor Statistics, there are five main services that companies within this sector provide:
- Electric power
- Natural gas
- Steam supply
- Water supply
- Sewage removal
Within the stock market, renewable energy producers are also considered their own entity of the utilities industry. This includes companies that produce and distribute renewable energy sources such as wind, solar, hydropower, and geothermal.
What It Means for Individual Investors
Since utilities are a necessary part of modern life, the utility sector is in high demand. As a result, utility sector stocks are relatively stable investments. Plus, the regulation of this industry and lack of competition in most regions make many utility companies’ performances more predictable, which is particularly helpful when investing.
You can begin investing in utilities sector companies through exchange-traded funds (ETFs) (like the Vanguard Utilities ETF and the Fidelity MSCI Utilities ETF), the S&P 500 Utilities index fund, or by researching and investing in individual utility companies.
It’s important to understand your investment risks before choosing a strategy. For instance, while investing in stocks can often yield higher returns, it is riskier than investing in ETFs and index funds. In addition, ETFs and index funds also pay out dividends to investors throughout the year.
Utilities Sector Stocks vs. Energy Sector Stocks
The main difference between the utilities sector and energy sector are the companies within each industry and the tasks they complete. The utilities sector includes companies involved in the production and distribution of utility services to customers, whereas the energy sector includes companies involved in the exploration, management, and production of resources such as water, oil, and electricity.
|Utilities Sector||Energy Sector|
|Provides utility services to customers||Provides energy resources to utility companies|
|YTD price return is 2.97%||YTD price return is 39.59%|
- The utilities sector is made up of stocks in utility companies providing services in the electric, water, gas, and renewable energy fields.
- Investing in the utilities sector is typically part of a long-term investment strategy.
- Since utilities are always in demand, this industry tends to perform steadily in all economies.
Frequently Asked Questions (FAQs)
Why does the utilities sector perform well in economic downturns?
Utilities help fuel our everyday lives—from lighting our houses to bringing us clean water. Since utility companies perform vital services, these companies tend to withstand economic downturns well. Even during times of economic upheaval, people and businesses still require utility services.
When does the utilities sector thrive?
Most utilities sector companies thrive during recessions and in times of economic instability. When interest rates are lower (typically during or before recessions), these companies tend to perform better. That’s why it’s often better to purchase utilities sector stocks when the economy is growing. However, utility sector stocks’ performance is generally stable overall.
What should I look for in a utilities stock?
While your investment needs might vary, you’ll want to review ETF and index fund dividend payouts when comparing your options. When comparing stocks, focus on company performance and profit before selecting a utilities company to invest in.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.