Best Utilities You Can Buy Now

Given the current volatility of the stock markets and the likelihood of continued turbulence in the future, utility stocks could easily be among the safest and most profitable investments in the years ahead.

Utilities have a reputation for being a staid and buttoned-down class of investments, often referred to as "widow-and-orphan" stocks because of their stable prices and reliable dividends. Utilities are generally viewed as companies with minimal downside risk -- and limited upside potential -- that can be counted on to provide a steady stream of dividend income.

Thanks in part to their monopoly status, utilities tend to be some of the most solid and predictable companies on the market. With stable revenues and a track record of returning the bulk of their income to shareholders, utility companies have been one of the greatest distributors of dividends for many years.

Of course, as in most industries, there are exceptions to the rule. The Enron debacle not only temporarily tarnished the reputation of utilities, but of the markets in general. Excluding this rare and unfortunate example of poor corporate governance, however, utility stocks have anchored the portfolios of many retirees and conservative investors for decades.

(1.)  Government Regulation

Our nation can't function without power plants and transmission lines: They're the backbone of our infrastructure. Few people appreciate their dependence on these unsung businesses -- until, that is, they're forced to go without electricity, running water or natural gas for a few days. With few exceptions, every consumer and business relies on these basic necessities, and without them, our economy would grind to a halt.

Having one electric provider is often far more efficient than several, and most utilities are organized as monopolies and regulated by state and federal authorities. In most cases, the government sets the maximum rates utilities can charge. These rates are set at such a level that the utilities may earn a fair rate of return on their assets, but not so high as to allow them to take unfair advantage of their monopoly status.

The result of a government-sanctioned monopoly coupled with guaranteed demand is, simply, cash. Utilities have strong and stable revenues protected by the highest barriers to entry. Plus these companies are defensive, meaning they aren't sensitive to the nation's broader economic condition. They offer slow, steady growth rates and generous dividend payouts. The average utility in the Philadelphia Utility Index offers a yield of about 3.5%, more than +50% higher than the average yield of the S&P 500.

Although most investors choose utilities for their stability and their rich dividend yields, the industry can also provide impressive upside potential, particularly when the broader markets are falling. When the market struggles, investors often seek shelter by rotating their money into stable utility providers. This "flight to quality" is one of the reasons why the utility sector often outperforms the S&P 500 during down markets.

But not all utilities are slow-growing behemoths. In fact, those that operate in countries like China and India are benefiting from electricity consumption rates that are growing at more than twice the U.S. growth rate. With this in mind, utilities in such markets can offer the best of both worlds: steady income and capital gains. Not surprisingly, these securities are often prized by investors, as they offer downside protection as well as market-beating total returns.  

(2.) Need for Alternative Energy

Government investment in renewable energy has led to enormous benefits for companies that are working to develop the technologies. What's more, you can bet that sustained high energy prices will be an effective incentive, encouraging more private investment in fossil-fuel alternatives.

(3.)  Shelter in a Market Storm

It's impossible to predict exactly how the global markets will perform in the years ahead. After several consecutive years of gains, however, some say we may be in for a rocky period of flat or even negative overall returns. This cyclical pattern has repeated itself again and again for decades.

In a tougher market environment, many investors will attempt to weather the storm by seeking shelter in defensive sectors like utilities. If a recession rears its ugly head or consumer spending slows, then discretionary purchases like high-priced vacations or big-ticket electronics are likely to decline. But money will still flow into inescapable necessities such as electricity and natural gas.

That is not to say that utilities are left behind when the market is climbing. In fact, the Dow Jones Utilities Index, which tracks a broad basket of gas, water, power and other utility providers, has delivered an impressive average annualized total return of about +20% for the past five years, well above the +7% for the S&P 500.

Putting it all Together

Many utilities offer hefty dividend yields, attractive fundamentals, and promising long-term growth prospects. As such, trying to narrow the huge pool of potential candidates down to just a select few investment ideas can be both difficult and time-consuming. Fortunately for you, we've already devoted many hours to just this task.

We conducted a comprehensive review and analysis of many of the world's leading utilities. After evaluating each of them on a number of quantitative and qualitative factors, we arrived at a select group of four finalists. This group includes two well known homegrown companies, as well as two foreign-based utilities that operate in some of the world's most promising regions. We'll dedicate the remainder of today's report to in-depth profiles of each of these standouts...