Investing for Income

Fidelity Select Utilities Aims for Defense and Income

This fund bets big on utilities with good growth prospects.

Utilities stocks can be easy to overlook. The sector accounts for just 3% of the S&P 500, and the stocks, even in hot markets, are lauded mostly for being Steady Eddies. “People buy utilities for defense and income,” says Douglas Simmons, manager of Fidelity Select Utilities (symbol FSUTX). Historically, they’ve delivered. During the 2007–09 bear market, for instance, utilities in the S&P 500 lost an annualized 32.8%, compared with a 43% slide in the broad index. And over the past half-decade, utilities in the S&P 500 index sport an average yield of 3.4%—a percentage point higher than the five-year average for the broad-market benchmark. (Returns and other data are as of June 12.)

The defense hasn’t been quite as stout this year. Amid COVID-19 market panic, the sell-off in utilities was slightly steeper than in the S&P 500, driven by investor fears of prolonged declines in commercial and industrial demand. Despite strong trends on the residential side of the business, utilities were slower to recover as the market rebounded. The S&P 500 Utilities index has lost 8.4% so far this year; the broader index is off 5.0%.

But utilities are well situated to get back on track as the world emerges from the pandemic, says Simmons. He favors firms that can increase earnings and dividends at a 7% to 8.5% annual rate, compared with the 5% long-term industry average. The fastest-growing utilities are expanding and updating their infrastructure to produce renewable energy, says Simmons. This requires favorable regulation from state and local commissions that oversee utilities’ operations.

The portfolio holds a mix of best-in-class alternative energy players—such as NextEra Energy (NEE), based in Florida—and heretofore slow-growing firms whose regulatory landscape is poised to improve. Simmons says he added to positions in California utilities, such as San Diego–based Sempra Energy (SRE), in 2019, after the state passed ambitious updates to its renewable-energy goals.

The top 10 holdings in the 27-stock portfolio account for 72% of assets. Over time, big bets on favored names have paid off. The fund has beaten its average peer in eight of the past 10 calendar years and outpaced 83% of peers over the past decade.

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