Could Buying Vanguard Utilities ETF Today Set You Up for Life?

Key Points

• Vanguard Utilities ETF owns a portfolio of what most would see as boring income stocks.

• The exchange-traded fund's dividend yield is an attractive 2.8% as I write this.

• Electricity demand is likely to grow materially in the next couple of decades, which could juice growth rates in this boring sector.

• 10 stocks we like better than Vanguard Utilities ETF ›

When investors think about utilities, they most likely think something along the lines of, "boring dividend stocks." That's a legitimate view of the sector, which is known for providing reliable dividends. In fact, the average utility is yielding around 2.8% today, which is more than twice the level of the S&P 500 index.

Buying a utilities-focused exchange-traded fund (ETF) like Vanguard Utilities ETF (NYSEMKT: VPU) could set you up for a lifetime of reliable income. But there's more to understand about the utility sector today that could change the expectations around this ETF for the better. Here's what you need to know.

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What does Vanguard Utilities ETF (VPU) do?

Vanguard Utilities ETF tracks the MSCI US Investable Market Utilities 25/50 Index. This index basically owns a diversified collection of utilities, with a stock count of 69. There are some nuances, but it really isn't too complex.

Image source: Getty Images.

All in, roughly 61% of the portfolio's assets consist of utilities focused on providing electricity. Another 24% or so is dedicated to multi-utilities, which usually sell some combination of electricity, natural gas, and water. Another 6% get classified as independent power producers, an area that is largely focused on electricity. So, all in, around 90% of assets are dedicated to investments that have some tie to electricity.

The rest of the portfolio is largely spread across pure-play water and natural gas utilities. That said, other than the independent power producers, the vast majority of the businesses in the index, and thus the ETF, are regulated.

Regulated utilities are granted monopolies in the areas they serve but need government approval for their rates and capital investment plans. The outcome is usually slow and steady growth.

There's a change taking shape in electricity demand

From a top-level view, if you are looking for a lifetime of reliable income, owning a diversified collection of utility stocks is probably a pretty good starting point. As such, this ETF would be a good fit for even risk-averse income investors. But there's a shift taking place in the electricity market.

Between 2000 and 2020, U.S. electricity demand grew a grand total of 9%. Between 2020 and 2040, however, demand is projected to grow by a huge 55%!

That's a step change on the growth front that will require material capital investments by utilities. And given that regulators have to ensure that utilities provide reliable power, it is likely to mean the boring utility sector starts to get a bit more exciting.

Utility stocks aren't suddenly going to become rocketing technology stocks, but technology is the big driver of demand here. For example, electricity demand from artificial intelligence and data centers is projected to increase 300% over the next decade or so. Demand from electric vehicles is projected to increase 9,000% by 2050. And electricity is expected to go from 21% of end energy use to 32%. That hints that utilities will likely be a bit more growth focused in the future than they have been in the recent past.

Don't pick winners, pick the sector

Some utilities are going to be better positioned to benefit from these demand trends than others. But trying to pick individual stocks isn't something that every investor will want to do.

For most, it will probably be better to recognize the big-picture trend and use an exchange-traded fund like Vanguard Utilities ETF. Not only will you end up with a lifetime of reliable income, but you'll also position yourself to benefit from the growth that comes along with rising electricity demand.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.