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Author: w2j2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Utilities Date: 9/20/2010 9:26 AM
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Utilities are paying nice dividends right now, and so are preferred stocks.

I question whether they contain a danger similar to bond funds: If interest rates go up, the stocks (my principle) will go down.
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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67538 of 76418
Subject: Re: Utilities Date: 9/20/2010 10:27 AM
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Just roughly, here is a comparison of Duke Energy and Vanguard LT Treasury fund (you might want to sync beginning dates. It doesn't look like interest rates have THAT big an impact, but utilities (at least Duke Energy) does fluctuate.
http://finance.yahoo.com/q/bc?s=DUK&t=my&l=on&z=...

But, I'd like to hear from others.

Hockeypop

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67539 of 76418
Subject: Re: Utilities Date: 9/20/2010 3:30 PM
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I question whether they contain a danger similar to bond funds: If interest rates go up, the stocks (my principle) will go down.



my guess : not yet.

...but could be wrong. some of us are treating them like CDs, but i think not enough yet.


imo, the danger is like other equities --they'll come down with a Major Market Crash.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67540 of 76418
Subject: Re: Utilities Date: 9/20/2010 4:45 PM
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Utilities are paying nice dividends right now, and so are preferred stocks.

I question whether they contain a danger similar to bond funds: If interest rates go up, the stocks (my principle) will go down.


There are actually at least three possible risks as interest rates rise;

1) Like you mentioned, if a stock is paying a dollar a year in dividends, then it will look less favorable as interest rates go up.

2) If the company has a lot of debt, then eventually their borrowing costs will go up as interest rates increase so their financial numbers may suffer.

3) If inflation is part of the reason for the interest rates going up, then the dividend will be devalued unless it increases too. For example if a company pays a steady $1.00 dividend, and inflation is 5%, then next year the dividend would need to be $1.05 just to stay the same in inflation adjusted numbers.

Greg

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67541 of 76418
Subject: Re: Utilities Date: 9/20/2010 5:32 PM
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To the extent a utility stock is like a bond -- they will behave like bonds. But keep these points in mind

#1 Bonds are far less risky than bond funds if/when interest rates start rising. If you keep a bond til maturity you will get the face value back (assuming no defaults)

#2 Unlike Bonds or Bond Funds, utilities actually can earn money -- i.e. they are not just a financial instrument. So even if they drop in value, that drop will be less percentage wise than any bond or bond fund. Caveat - any company can go bust e.g. General Motors, but absent such the Utilities will do better.

#3 You post sound like you are looking for yield/income. That is fine if you expect to die or otherwise not need the money in the next few years. But if you expect to be spending money in a 15 or 20 years, you need some growth or you will give up a lot of purchasing power.

Gordon
Atlanta

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67542 of 76418
Subject: Re: Utilities Date: 9/21/2010 2:35 PM
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There are some utilities that increase their dividend pay out each year. ED, SO, and CNP are a few. So that takes care of some of the inflation worries.

Also, it depends why are you investing. Income? Then it doesn't matter what the stock price does as long as it keeps paying the dividend. Its like you've bought a bond for X% return.

JLC

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67543 of 76418
Subject: Re: Utilities Date: 9/21/2010 2:45 PM
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To me, the biggest concern faced by utilities at this time is global warming and potential carbon capping regulations. Most get most of their energy from coal. They face major needs for capital and new investment depending on what regulations are finally adopted (if any).
To me, this is a time of uncertainty.

Clean coal, natural gas, carbon sequestration, wind, solar, nuclear. Big changes seem to be coming to the industry. Which ones will adapt best?

Yes, those who want income will probably sell their utility stocks if they can get better yield elsewhere. So yes, I would expect utility stocks to at least be limited by rising interest rates. But the ability to increase dividends does tend to moderate that concern. (But some much more than others.)

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67544 of 76418
Subject: Re: Utilities Date: 9/21/2010 5:29 PM
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Paul wrote To me, the biggest concern faced by utilities at this time is global warming and potential carbon capping regulations.

I understand, but the key word is potential. The key item is time frame. It takes a great deal of time to build a power plant - 5 to 10 years even for natural gas. While many people are concerned about carbon emissions from coal plants, net carbon emissions for charging electric cars are less then 40% of the gasoline costs for even 30 mpg cars.

If your time frames for investment i.e. until death are under 20 years I would forget this issue. I wish I had a dollar for every time I have been told Phillip Morris was dead -- it out lived General Motors.

My prediction is some new technology will happen - probably more efficient solar. When I hear about the demise of coal power plants, I think about the concerns with horse droppings in 1900. There was an article in Scientific American in the 1890s saying the island of Manhattan would collect enough horse droppings to cover the entire state of Iowa 1 foot deep each year. Along come the auto and down drops the horse dropping problem.

I believe current solar cells are will under 10% efficient. It is not hard to think a NASA type program could push the efficiency into the mid 20s.

Gordon
Atlanta

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67545 of 76418
Subject: Re: Utilities Date: 9/21/2010 6:29 PM
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I understand, but the key word is potential. The key item is time frame. It takes a great deal of time to build a power plant - 5 to 10 years even for natural gas. While many people are concerned about carbon emissions from coal plants, net carbon emissions for charging electric cars are less then 40% of the gasoline costs for even 30 mpg cars.

If your time frames for investment i.e. until death are under 20 years I would forget this issue. I wish I had a dollar for every time I have been told Phillip Morris was dead -- it out lived General Motors.


The greenhouse gas tailoring rule regulation greenhouse gases was promulgated on May 13, 2010.

The boiler MACT is due to be promulgated on 12/16/2010. The proposed rule lowers emission standards quite a bit over the current standards. MACT usually have a 3 year compliance frame.

EPA is proposing a lower ambient air quality standard for ozone. That rule may come out any day now. It was due in August.

Of the three rules I mentioned, this could be the most devastating to the utilities and the economy in general. In some areas like NC, reducing nitrogen oxide emissions from power plants is one of the main control strategies. All of these regulations are or will be final soon and compliance will take place over the next few years, costing utilities billions of dollars.

PSU

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67546 of 76418
Subject: Re: Utilities Date: 9/21/2010 10:05 PM
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That sounds like the world is going to end BS the auto and petroleum industry said about lead in gasoline. Is is an issue yes. But don't bet you lunch money on Duke power going broke over it.

Gordon
Atlanta

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67547 of 76418
Subject: Re: Utilities Date: 9/21/2010 10:17 PM
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That sounds like the world is going to end BS the auto and petroleum industry said about lead in gasoline. Is is an issue yes. But don't bet you lunch money on Duke power going broke over it.

I never said they would go broke. It will definitely cost them money to upgrade. It may affect their dividend. Utility commissions often allow utilities to charge more to recover capital costs. But don't buy your head in the sand like an ostrich and think everything will be fine over the next 10 years. I'm pretty sure I know a little bit about this subject.

PSU

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Author: foolazis Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67551 of 76418
Subject: Re: Utilities Date: 9/22/2010 4:42 PM
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I believe current solar cells are will under 10% efficient. It is not hard to think a NASA type program could push the efficiency into the mid 20s.

The key will be finding the right materials. Any given material has quantum mechanical limitations to its efficiency of energy conversion.

foolazis

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67554 of 76418
Subject: Re: Utilities Date: 9/22/2010 10:18 PM
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"But don't bet you lunch money on Duke power going broke over it."

I agree Gordon. I'm sure some very smart people are working on the best, most cost effective solution in their situation. And eventually they will get it right--at some cost and after some investment.

Let's hope they get it right.

But the thing is, this situation adds a measure of uncertainty to the utility business that is not usually there when people recommend utilities as conservative investments. So one needs to be aware and a bit more careful at this time.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67555 of 76418
Subject: Re: Utilities Date: 9/22/2010 10:50 PM
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It is not hard to think a NASA type program could push the efficiency into the mid 20s.

Not to high jack the thread, but with NASA's main push being redirected to making muslim nations feeling better about themselves via our fearless leader, I wouldn't count on technology leaps generated by NASA.

JLC

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Author: Howie52 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67567 of 76418
Subject: Re: Utilities Date: 9/26/2010 9:24 PM
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"Utilities are paying nice dividends right now, and so are preferred stocks.

I question whether they contain a danger similar to bond funds: If interest rates go up, the stocks (my principle) will go down. "

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

One risk with utilities is if the economy drops like a stone,
utility usage also drops - as do earnings that fund dividends.

Preferreds tend to have a low volume and are at the mercy of
large holders selling.

There is always risk and if everything goes to pot - then the
overall results will go to pot.

However, there are tendencies where dividend stock prices drop if
the value of the dividend stream is impacted. A high interest
rate environment or a high double tax on the dividends will
impact most dividend stocks.

Howie52

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Author: easyrob Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67753 of 76418
Subject: Re: Utilities Date: 11/29/2010 11:24 PM
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make muslims feel better?? your prejudice seems to be leaking, maybe better to stay on topic.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67758 of 76418
Subject: Re: Utilities Date: 11/30/2010 11:04 AM
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Do a quick Google and you'll see plenty of articles along this line.

http://www.theatlanticwire.com/opinions/view/opinion/Conserv...

Prejudice? No. So explain to me why NASA should be wasting time and money making muslims feel important instead of studying space?

JLC

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67770 of 76418
Subject: Re: Utilities Date: 12/1/2010 1:36 AM
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w2j2

???? Good Question::

Past performance is not a prediction of future returns!

But lets look at the period from January 2005 - January 2008 when the interest rates went up (especially short term):

We can use the Dow Jones Utility index for proxy of Utilities.

______ STOCK
Value Jan 08
Last Dividend in 07
Value Jan 05
Last Dividend in 04


AES AEP CNP D DUK ED EIX EXC FE NEE NI PCG SO WMB

19.09 39.96 13.55 38.01 15.74 36.87 47.23 67.5 61.97 57.91 15.87 36.63 31.6 29.98
0 0.41 0.17 0.20 0.22 0.58 0.305 0.44 0.5 0.41 0.23 0.36 0.403 0.1
14.05 27.22 8.57 27.70 11.7 32.00 27.41 36.05 31.25 31.36 16.91 28.41 25.42 15.15
0 0.35 0.1 0.33 0.275 0.57 0.25 0.4 0.375 0.34 0.23 0.3 0.358 0.05


So for a total of one share of each stock:

January 08 "Principle" of $511.91 w/ dividend of $4.326

Definitely up from

January 05 "Principle" of $333.20 w/ dividend of $3.926

SO-
Over this time period:
Principle growth of approximately 42%, ~12.2% annualized
Dividend growth of approximately 9.7%, ~3.1% annualized

Dividends = 3.3% yield on current price or 5.19% yield on investment price which ever way you prefer to look at it.

So based on this - I would say, NO! Just because interest rates go up - does not mean your principle will go down!



d(Utility)/dT

Who left PEG out of the equations cause being the under achiever - didnt want to dig up historical prices for that bugger. But will note - was not a very good time for them and may bring the numbers down but not directly related to interest rates!!

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