With Warren-Buffett leading Berkshire Hathaway by buying the remaining stake in Berkshire Hathaway Energy, is it time to buy utility dividend stocks?

It’s been another great year for the stock market, with the broader indices climbing to new highs. But Warren Buffett’s comment from Berkshire Hathawayhis (NYSE: BRK.A) (NYSE: BRK.B) annual shareholder meeting and changes in the company’s public stock holdings indicate that Berkshire is not a net buyer in today’s market.

Berkshire reduced its stake in its largest public shareholding, Appleby almost 50%, he reduced his position Bank of Americaand many others. In total, Berkshire sold more than $100 billion in stock this year and built up a cash and treasury bill position of more than $300 billion.

However, Berkshire appears to remain bullish on the utilities and energy sectors, as evidenced by its sizeable positions in Chevron and Occidental Petroleumas well as the decision to buy the remaining 8 percent of Berkshire Hathaway Energy (or BHE, for short) — giving Berkshire full control of the entity.

Here’s a look at how Berkshire Hathaway Energy fits into the broader business, the benefits of investing in dividend-paying utility stocks, and a low-cost exchange-traded fund (ETF) worth considering now.

BHE fits perfectly into Berkshire’s public and private portfolio

Berkshire is known for its public holdings. But a lot of additional value is added in its insurance businesses, owned by BNSF railroads, BHE and other business units. Berkshire loves boring businesses that make money and can consistently grow their earnings and dividends — like Coca cola and American Express. BHE embodies this philosophy.

BHE contains various electric and gas utilities, pipelines and other infrastructure assets. Its domestic regulated energy interests include four U.S. regulated utilities and five U.S. integrated natural gas pipelines with 21,000 miles of operating pipelines, among other assets.

Unlike the exploration and production or refining side of oil and gas, whose profit margins depend heavily on oil and gas prices, the downstream oil and gas industry operates like a toll road — charging tolls to move energy products throughout the country from production areas to consumption or export areas.

Regulated utilities work with government agencies to set fair prices for consumers. This can give utilities a profit, allowing them to invest in more infrastructure and pay dividends to shareholders.

Investors can buy shares of Berkshire Hathaway to gain exposure to BHE. But a simpler and more direct approach may be to buy an ETF with broad exposure to the utilities sector.

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The utilities sector could have room to run

The Vanguard Utilities ETF (NYSEMKT:VPU) reflects the performance of the utilities sector. The fund is up 27.8% year-to-date — outperforming S&P 500, Nasdaq Compositeand Dow Jones Industrial Average.

The Vanguard Utilities ETF has an expense ratio of 0.1%, has a minimum investment of just $1, and yields 3%. Even after its debut, it still sports a somewhat reasonable price-to-earnings (P/E) ratio of 25 — which is lower than the S&P 500, but high for a traditionally low-growth sector.

The sector has been a beacon of safety for value investors seeking passive income in an otherwise expensive market. But after its rally, investors may wonder if it’s the best sector to buy now.

Context is critical in the stock market. The utilities sector fell slightly from 2020 to the end of 2023 — trailing broader indices by a wide margin over those four years. So its recent rebound may be partly due to the sector being oversold.

Additionally, greater demand for computers to power AI models could be a boon for electric utilities and justify infrastructure investment.

Lower interest rates add even more fuel to the fire. The Federal Reserve just cut interest rates for the first time in four years. Lower interest rates reduce the cost of capital and increase the potential return on investment for capital-intensive projects such as power generation, transmission and distribution.

Many utilities also have a significant amount of debt on their balance sheets. Lower borrowing costs could help these companies refinance debt and reduce their interest expenses.

A boring but effective way to increase your passive income stream

The utilities sector has not been a bargain since the start of the year, but it remains a solid sector for passive income-oriented investors. The year-to-date gain looks massive and overextended at first glance, but a good part of that is due to how battered the sector has been over the course of the year.

Investors looking for safe, reasonably valued markets may want to consider the Vanguard Utilities ETF as a simple yet effective way to diversify into the utilities sector.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the listed stocks. The Motley Fool has positions and recommends Apple, Bank of America, Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

With Warren-Buffett leading Berkshire Hathaway by buying the remaining stake in Berkshire Hathaway Energy, is it time to buy utility dividend stocks? was originally published by The Motley Fool