Make sure you're holding water

Invest in water utility firms - at Moneyweek.co.uk - the best of the week's international financial media.

For investors in water utility firms, the last decade and a half has been something of a choppy ride. When the companies were privatised in the early 1990s, their shares initially rocketed before falling back to earth in the latter part of the decade: the boom engineered by the US Federal Reserve Bank in the late 1990s made growth stocks all the rage, and steady dividend payers - such as utilities - very, very unpopular. Since then, however, investors, burnt by the dotcom fallout, have gradually begun once again to grasp the solid virtues of yield, and that means that the UK's water companies should once again be on every trader's radar.

Or so you'd think, says Tony Jackson in The Sunday Telegraph. But there is something a little odd going on in the investment world. We constantly hear that investors are "desperate" to make every scrap of yield they can and will run any risk to secure it. This has been true of bond investors for some time, but if equity investors feel the same way, why aren't they buying the UK's high-yielding shares? Consider the highest yielder in the FTSE 350, United Utilities. Its shares currently yield 7.4%. You might look at that return and think the firm must be in some kind of trouble (a high current yield is often a sign that a firm is expected to have to cut its dividend. But there's no trouble here: this is a water stock, a licensed monopoly with prices fixed by the regulator, prices that are now mapped out for the next five years. So what's the problem?

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