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Summary The expense ratio and dividend yield are both great. The dividend yield could be further enhanced by changing the weighting structure to emphasize utility companies with stronger yields. The Federal Reserve meeting on December 16th may include a rate increase that could create some nice sale opportunities on utilities. As we prepare for the holidays, I’m getting my shopping list ready. One of the additions to my list is the Vanguard Utilities ETF (NYSEARCA: VPU ). I’ll take investors through my reasoning for putting this on the list as a potential acquisition for the middle of December or later. Expense Ratio The ETF is posting .12% for an expense ratio. What else is there to say? That is a solid expense ratio and makes this fund one of the cheapest options for exposure here. Largest Holdings The diversification within the ETF is pretty weak. For a very long term holder it might make sense to replicate the ETF by just buying the underlying securities and taking higher trading costs to eliminate the expense ratio. However, an expense ratio of only .12% would be difficult to beat without a fairly long time horizon or a large volume of commission free trades in the account. (click to enlarge) The major holdings here are the same ones I would expect to see. Duke Energy Corporation (NYSE: DUK ) is a fairly huge utility company and frequently at the top of the list for utility ETFs. All around this appears to be a reasonable portfolio for an investor that wants to get more utility companies into their portfolio without having to buy the companies individually. Top Dividend Yields The following chart demonstrates the top 10 utilities for dividend yield that have increased their dividend for at least the last 5 consecutive years: Symbol Company Name Yield Years CNP CenterPoint Energy 5.34% 10 SO Southern Company 4.81% 15 DUK Duke Energy Corp. 4.62% 11 PPL PPL Corp. 4.39% 14 STR Questar Corp. 4.07% 36 ALE Allete Inc. 4.02% 5 DGAS Delta Natural Gas 4.01% 11 ED Consolidated Edison 3.95% 41 AEP American Electric Power Co. 3.95% 6 NWN Northwest Natural Gas 3.91% 60 There is quite a bit of cross over between the list as DUK, PPL, AEP are on the top 10 holdings and the 10 utilities for high yields. Because VPU is using a market capitalization weighting scheme, their top holdings are dominated by the largest capitalization utility companies. Using a market capitalization weighting scheme is great for keeping expenses low and maintaining a passive style, but the strategy does nothing to boost the dividend yield of the portfolio. If the price of shares in a utility is increasing but their dividend is not, that utility will see their ranking within the portfolio increase. While I’d prefer to see a focus on utility companies that offer a strong combination of high yields and expected growth in their dividends over the next several years, I’m still consider VPU as a potential holding due to the very low expense ratio and desire to maintain diversification in my portfolio. Looking For Utilities With the Federal Reserve poised to raise rates in December, it seems like a great time to be fishing for good prices on utility companies with an eye to keep buying as long as rates are going up and prices are going down. Utilities tend to have a significant correlation with bonds and an increase in rates will generally send share prices lower. To put that a different way, an increase in bond yields will drive an increase in utility yields. If the price of the utility is falling simply because bond yields are moving higher and the utility yield needs to move in a similar fashion, that is a fine buying reason for me. VPU or Individual Utilities If my portfolio was large enough to plan on buying 10 individual utilities with material allocations to each, I’d be treating individual utilities as being a superior plan to simply buying into VPU. However, going into December I am also looking to beef up my position in equity REITs with the Schwab U.S. REIT ETF (NYSEARCA: SCHH ), and my international positions with the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) or the Schwab International Equity ETF (NYSEARCA: SCHF ). Since I won’t have a great deal of cash left over, I would be more likely to look at taking VPU rather than buying up the individual securities. Conclusion Utility companies can act as a form of income investment because of their strong dividend yields. Unlike buying into a bond portfolio investors can expect that the level of dividends will be increasing over time which makes up for the portfolio having more risk than a simple bond portfolio. I’ve added VPU to my list of ETFs to keep an eye going through December and into early 2016 as a possible candidate. I won’t make those moves in the next few days, but I’ll be looking to see if shares fall hard after the Federal Reserve meeting on December 16th. Scalper1 News
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