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A Biden tax hike could give utility stocks a boost

November 20, 2020. Summarized by summa-bot.

Utilities aren't typically the most exciting companies on Wall Street. But if President-elect Joe Biden is eventually able to reverse some of President Trump's tax cuts, it could prove a big win for investors in power and water companies.

Utilities are legally allowed to pass higher tax expenses on to their customers.

Experts aren't predicting a major increase in rates — especially in a still-weak economy — but even a slight hike could help boost revenue and earnings for utilities as well as improve their balance sheets.

"Any change in tax law would mean that the amount of money utilities collect goes up," said John Bartlett, president of Reaves Asset Management, which runs the Reaves Utility Income Trust (UTG) and Virtus Reaves Utilities ETF (UTES).

"The bottom line is that utilities have advantages over other stocks if there is tax reform. "

A potential increase in taxes for wealthy individuals — and not just businesses — under Biden could also push more affluent investors into utility stocks.

That's because utilities pay big dividends, which often yield more than government bonds.

"There has been a lot of interest lately in higher yielding securities, including utilities," said Will Rhind, CEO of GraniteShares which runs the GraniteShares HIPS US High Income ET.

"Utilities are more of a defensive sector.

And there are some actual growth opportunities in the utility sector as well, most notably for companies that have had the foresight to invest in renewable energy sources like wind and solar.

Zananiri said that NextEra (NEE), a Florida-based utility, is a major player in clean energy.

That makes it one of the more rapidly growing and better performing utilities.

The transition to clean energy is also boosting utility stocks, and more power companies are going to have to get on board.

Waghorn said his fund owns shares of NextEra because of its alternative energy prowess and added that many European utilities are also worth looking at because they are ahead of the curve.

Spanish utility Iberdrola (IBDRY), which is making big investments in renewable energy, is also in Waghorn's fund.

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