Recent Sell – BMO Utilities ETF

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A sector that has been under-represented in my portfolio has been the Utilities sector. The only exposure I had to the sector was via an ETF – BMO Equal Weight Utilities Index ETF (ZUT.TO). Even though the exposure has been small and the only one, I decided to liquidate my holdings in the ETF and will be looking to purchase some stocks in the sector instead. The ETF provided good stability and regular monthly income. However, there were a few things that bothered me that caused me to sell the position.

  • After owning the fund for close to 3 years, the fund price has remained flat – although I was earning 4% on the investment. While I dont really look for capital gains per se, I know that the income isnt being compounded as is achievable via dividend growing companies.
  • A thin exposure of just 12 companies – all in the Canadian sector, although some companies have operations in the US.
  • An expense ratio of 0.55% for owning just 12 companies! I dont really gain much of a diversification and dont see the value of paying 0.55% for such a thin ETF.
  • In addition, more than 10% of the exposure to one company – Just Energy Group Inc (JE.TO), which last time I checked had some horrible financial figures. I do not want any exposure to this company – let alone a 10% exposure while paying that damn fee for the privilege of investing.
  • No dividend growth.

With this sale, I lose $90.48 in forward annual dividends.

What’s next for those funds from the sale? I am looking to pick up some shares in individual utility companies. Some of the companies on my shortlist are:

  • Diversified Utilities
    • Algonquin Power & Utilities Corp (AQN.TO)
    • Atco Ltd (ACO.X.TO) / Canadian Utilities (CU.TO)
    • Brookfield Infrastructure Partners LP (BIP.UN.TO)
    • Brookfield Renewable Energy Partners LP (BEP.UN.TO)
    • Duke Energy Corp (DUK)
  • Electric Utilities
    • Consolidated Edison Inc (ED)
    • Fortis Inc (FTS.TO)
    • The Southern Company (SO)
  • Water Utilities
  • Natural Gas Utilities
    • ONEOK Inc (OKE)

What are your thoughts on these companies mentioned? Are there any other companies that I should be looking at?

35 thoughts on “Recent Sell – BMO Utilities ETF

  1. Bernie says:

    Canadian Utilities (CU.TO) would be another excellent utility to add. They have a long, outstanding dividend growth record with a 43 year streak and are value priced right now.

    • Bernie,
      Thanks for the suggestion – yes, I am looking at CU.TO. I understand that it is part of the Atco companies – I just need to do some more research in understanding the company structure. Really good div streak from CU.

      Best
      R2R

  2. Your sale of the ETF makes sense to me. As you said, no compounding for one thing, and with an ETF you have to accept the bad holdings along with the good..

    The fee also bothers me. If you pick solid utilities and hold for the long haul, you get to keep that half percent. I’m an old guy and I would still rather have the money go into my pocket. In your case, having 30 years or so until retirement, that half percent could make a big difference after compounding.

    I do own some SO (along with a little AEP and PPL), and just recently added a bit. Love the 5% yield on SO, and I get to keep all of it :-).

    • DG,
      Thanks for the suggestions. I have owned SO in the past – and had to sell it last year when we were funding our home downpayment. The good thing is that the stock has been flat and I think its a bit lower than my sale price. The only diff is that the dividend has gone up 🙂 I am seriously considering adding it back to my portfolio – like you said, the 5% div yield is hard not to like.
      I will have to check out the AEP and PPL. Thanks for the suggestion.

      cheers
      R2R

  3. Hey R2R,

    I’d like to place a vote on Atco Ltd, and Canadian Utilities. Either or are great choices, though I prefer Atco Ltd. A long stream of dividend growth and it looks like it’s trading at a good price right now. Not to mention the 5-year average yield is 1.82%, and it’s now sporting a 2.42% yield.

    Best regards
    DB

    • Thanks for sharing your thoughts, DB. I am looking at those two companies – and they sure have a great track record. I also noticed a few fellow div bloggers recently picked up CU after it hit new 52-week lows recently.

      R2R

  4. I have never liked funds, so from my perspective you did a good move. I prefer individual dividend stocks. I use ETF only for savings purpose (not investment) and yet lately I decided to adjust my strategy and stop using them too.

  5. Hey R2R. I think you did a right move and sell ZUT. I like ETF’s but I like ETF’s with Many companies in it. I think ZUT with it’s 12 holdings and .55 MER doesn’t give you much incentive to buy it same with ZEB which is worst and only holds 7 big canadian banks at a .55 MER. I might as well buy Individual stocks saving that precious MER. I liked ZEO which is just as bad but I was planning on holding it till it reached it’s high at a 30% upside from current prices and sell for capital gains but I’d rather just focus on solid quality blue chips.
    I think ETF’s and following the Canadian Couch potato portfolio still has a place in our portfolio. Why not do both Indexing and Individual stocks right? Anyways, bottom line; only you know what’s best for you. Thanks for sharing and keep up the hustle my friend. Always a pleasure.

    • You are right about all those ETFs, DH. Cant believe BMO charges 0.55% for the ZEB etf – with just 7 banks. Thats just insane.

      As you are familiar, I use both stocks and ETFs for investing…We use ETFs exclusively for my wife’s portfolio and I had 2 etfs leftover – but now just down to 1.

      R2R

  6. 0.55% is not worth it R2R, you made the right choice there, I am sure you can do better with stock picking, I myself bought myself OKE few days ago nearing its 52 week low, I think its attractively valued there, I am just a bit cautious tho not to get too trigger happy due to economic concerns and falling commodity prices. EMR and SO are also in my watchlist.

    • Thanks for sharing your thoughts. OKE looks great right now. I remember looking at it a few years ago, and passed on it..and I want to look at it again closely.

      cheers
      R2R

  7. I like ED. If I was not so concentrated in energy, I would by a bit myself.

    Keep cranking,

    Robert the DividendDreamer
    AKA — Seeking Dividends

    Follow me on Twitter– Seeking Dividends@DividendDreamer

  8. I totally agree with you. I am undergoing the same process of recognition. The more I see what individual stocks can do for you the less I like ETFs, mutual funds and similar waste-of-money investments.

    • Ive looked at VPU for exposure too, and its a much better ETF than the one I was holding. Definitely would recommend that ETF than ZUT.TO for investors. The utilities will suffer a bit for sure, but over the long term – im sure they are good investments because, well, they are utilities – essential services. The ridiculous valuations for >20+ P/E will come down though – which we are already starting to see in some companies.

      R2R

  9. R2R,
    It will be very interesting to see where you will deploy that cash. I’m looking to average down my OKE and AQN shares. Also I was considering CU as a new position, but now ENB is higher on my watchlist.

    • DL,
      All those companies mentioned are great opportunities. Would love to own ENB as well.

      Am really like the water exposure and the renewable energy exposure in AQN in addition to the traditional electric utility space. Another added bonus with AQN for us Canadians is that even though its a TSX-listed stocks, most rev is from US and dividends are paid in US$, so that bumps up the dividend a bit.

      I will doing a lot of reading this weekend and will be sure to share my thought process in taking taking the decision.
      R2R

  10. eldee says:

    Very good reasoning and analogy why you sold.
    As far as utilities go, my personal opinion that
    it is NOT a good time to invest in utility equities.
    Utilities, Pipelines, Telecos, Infrastructure, are the first things to get hit when there
    is rising interest rates. We all know it is not a question of IF, but a question of WHEN
    down the road this year that rates will start to move up. But, if I was going to buy one
    in the future on a dip, it would be CU. I would be looking
    to invest in Lifcos, ie. Manulife., The Lifecos do well in rising
    interest environment. They banks also do well too. But not now.
    Personally, I think the market is too frothy and is very close
    to running out of steam. I would be cautious and have a little
    more cash than usual, on the sideline to deploy on a good pullback.
    Just my two Canadian cents.

    • Appreciate the input eldee.
      I realize that the utes, pipelines and REITs will probably see some correction in the stock prices when the Fed raises rates. But at the same time, I dont want to try and time the market and am simply looking for a well diversified portfolio, with a minimal exposure to the utes sector perhaps. Moreover, whatever moves the Fed makes, will be small – and compared to the historical interest rates, they will still be low. Income-focused investors will still need to look for the bond substitutes in the future.

      Your suggestions sound like good ones – I am reading up more on CU and will be doing more research on the wknd. The LifeCos also look good – I briefly looked at them but then ended up going with POW.TO last month – but would still like to add a LifeCo – both MFC and SLF are really interesting in the space, with ample exposure to the Asian market.

      cheers
      R2R

  11. I think you have done the right thing. There is no reason to pay a steep annual management fee, if you can simply purchase shares in those same companies, and incur a one-time expense ( which would likely be smaller than the annual cost of holding that ETF).

    I am generally not a big fan of utilities, though there are some exceptions.

    Best Regards,

    Dividend Growth Investor

    • Thanks for stopping by and the words of encouragement, DGI. The ETF was not doing much for me and I am looking to invest directly in some companies. A lot of the utes have come down after a great performance in 2014. Hopefully, I will be able to put it to work soon.

      Best wishes
      R2R

  12. R2R! It’s been a while, got busy with other things, but I still check in from time to time. I think you did a good thing here as that ETF was not worth your money. As you astutely pointed out, there is a place for ETF’s, as there are lots of people who do not want to do the research or simply do not have the inclination. I am a shareholder in ED and NGG. I also have ATO on my watchlist. They are a local utility and are also dividend champions, having 31 years of consecutive dividend growth. Good luck and I’m sure you’ll be much better off picking your own stocks and not paying any fees.

    – HMB

    • Hey HMB,
      It has been a while. Good to hear from you.
      I checked NGG and noticed that they pay dividends just twice a year…although nothing wrong with it. I will have to look at it again. I havent heard of ATO – will check it out. Thanks for the tip.

      cheers
      R2R

  13. eldee says:

    hi R2R…..FYI…..great article in case you missed it in G&M on June 2/15 by John Heinzl on CU….. “Why I’m buying more of this beaten down utility…..”

    here is the link…..enjoy the read….eldee

    http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/dividend-investing/why-im-buying-more-stocks-of-this-fallen-utility/article24758767/

    I like John’s closing thoughts on CU……..I could not agree more !

    “No stock is risk free. A prolonged slump in the energy sector and in Alberta power prices would likely exert a drag on Canadian Utilities’ earnings and dividend growth, but its regulated utility operations and capital investments should help to counter the damage. A faster-than-expected rise in interest rates would also likely be negative for the stock. Be sure to do your own due diligence before investing in any security.”

    • I agree with those closing statements as well, eldee. No investment is risk free. If theres no risk, theres no reward. We just have to pick and choose how much risk we want to take.

      Unfortunately, I am not able to read that article – since I am not a Globe Unlimited subscriber. Thanks for thinking of me and sharing the post thought. Appreciate it.

      Best
      R2R

      • eldee says:

        R2R…I am a Globe Unlimited Subscriber…….I got the article for you to read….

        Why I’m buying more shares of this beaten-down utility

        John Heinzl is the dividend investor for Globe Investor’s Strategy Lab. Follow his contributions here. You can see his model portfolio here.

        Even good companies with long records of dividend growth will test the patience of investors from time to time.

        Case in point: Canadian Utilities Ltd.

        When I “bought” the shares for my Strategy Lab model dividend portfolio in September, 2012, they were trading at $33.92. They rose steadily, peaking at more than $44 in January of this year, but have since given back much of those gains. On Tuesday, they closed at $36.91.

        Why the pullback? A few reasons.

        First, Calgary-based Canadian Utilities took a hit of $46-million in the first quarter related to Alberta Utilities Commission regulatory decisions affecting returns from Jan. 1, 2013, through March 31, 2015. Excluding adjustments for 2013 and 2014, first-quarter earnings in the utility division would have been $22-million higher than a year earlier.

        Second, mild weather and increased supply contributed to a 52-per-cent drop in Alberta power prices during the first quarter compared with a year earlier, hitting the company’s independent electricity generating operations. Canadian Utilities was also affected by lower “frac” spreads in its natural-gas processing business.

        This all culminated with a 30-per-cent drop in first-quarter adjusted earnings, to $130-million or 49 cents a share from $186-million or 71 cents a year ago.

        As tough as the quarter was, I’m not giving up on Canadian Utilities that easily. In fact, I’m doing the opposite: With the share price down more than 15 per cent from its recent peak, I’m using some of the cash in my model portfolio to purchase another 15 shares, bringing my total to 155.

        Here’s why:

        It’s a dividend growth machine

        Certainly, the downturn in Alberta’s economy creates headwinds for Canadian Utilities, but this isn’t the company’s first rodeo. It has increased its dividend every year since 1972 – one of the longest streaks for a Canadian company – including a 10.3-per-cent increase announced in January. That stellar record demonstrates its ability to navigate the ups and downs of the business cycle. What’s more, the payout ratio is conservative at less than 60 per cent of estimated 2015 earnings, which gives the dividend plenty of protection and leaves room for future increases. In a recent note, RBC analyst Robert Kwan estimated that the dividend will grow to $1.30 annually in 2016, up from $1.18 currently – a projected increase of more than 10 per cent. That’s not guaranteed, of course, but you can bet the company will do everything in its power to keep its dividend growth record intact.

        The yield and valuation are attractive

        Reflecting the lower share price and recent dividend hike, Canadian Utilities’ yield has climbed to about 3.2 per cent currently from 2.6 per cent at the start of the year. That’s attractive, considering the dividend will almost certainly continue to grow. The price-to-earnings multiple, meanwhile, has slipped to about 17.3 (based on 2015 earnings estimates), down from 18.6 in January. It’s not a dirt-cheap valuation, but it’s reasonable for a company that produces most of its earnings from regulated gas and electricity transmission and distribution utilities, which throw off relatively predictable cash flows and are insulated from competition.

        The bad news is baked in

        Canadian Utilities isn’t the sort of stock that’s going to double in a short period of time. But given the stable nature of its earnings, it likely won’t plunge in price, either – particularly since the stock is well off its highs. Mr. Kwan’s “base case” target price is $42, with an “upside scenario” of $52 and a “downside scenario” of $34. But the bearish case assumes a 2-percentage-point increase in long-term interest rates, which seems unlikely.

        The company is investing in its future

        To keep its earnings and dividends growing, Canadian Utilities is pouring money into new transmission lines in Alberta, a gas pipeline in Mexico and numerous other projects. From 2015 through 2017, it plans capital investments of $5.1-billion in its regulated utilities. The company, whose controlling shareholder is ATCO Ltd., is also exploring new avenues for growth, such as a $200-million investment to develop salt caverns for hydrocarbon storage. These projects will bear fruit for investors in the coming years, and if energy prices recover, that will work in Canadian Utilities’ favour, too.

        The balance sheet is strong

        Even as Canadian Utilities’ assets grew to $17-billion in 2014 from $9-billion in 2010, the company maintained a single-A credit rating that allows it to borrow at attractive rates to fund future expansion.

        Closing thoughts

        No stock is risk free. A prolonged slump in the energy sector and in Alberta power prices would likely exert a drag on Canadian Utilities’ earnings and dividend growth, but its regulated utility operations and capital investments should help to counter the damage. A faster-than-expected rise in interest rates would also likely be negative for the stock. Be sure to do your own due diligence before investing in any security.

        Disclosure: The author owns shares of CU personally and in his Strategy Lab model dividend portfolio.

        • You are a rock star, eldee. Thanks for sharing the post. Really good to hear and read about the analysis and whats happened in the recent quarters and whats coming in the future.

          Best
          R2R

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