Survivor: These Funds Resist the Recession

See David Peltier's video of utility companies with safe dividends and those investors should avoid. Peltier is portfolio manager of the Dividend Stock Advisor.

For investors who have thrown in the towel, it's worth considering utilities funds.

After they collapsed during the bear market of 2000 to 2002, some analysts gave them up for dead. Then, without much fanfare, utilities funds recovered and raced ahead.

During the five years ending in January, utilities funds returned 6.2% annually, outdoing the S&P 500 by 10 percentage points and beating every domestic equity category except precious metals, according to Morningstar. Utilities funds remain solid options for surviving the recession. Their saga demonstrates how battered funds can change their ways and eventually rebound.

The trouble for utilities funds had its roots in the go-go markets of the late 1990s. Up till then, utilities funds had been conservative, holding mainly regulated electric producers and telephone companies that provided safe dividends.

With technology companies soaring in the bull market, some utilities funds moved away from the stodgy approach and bought hotter stocks, such as Enron, the razzle-dazzle energy trader, and WorldCom, a fast- growing telecom giant.

When the high-flyers crashed, utilities funds collapsed. In 2001, the funds dropped 20.7%, trailing the S&P 500 by nearly 9 percentage points. Utilities funds went on to lag the benchmark by wide margins for the next two years.

Seeing the damage, a Morningstar analyst wrote an article in 2002 headlined, "Are Utilities Funds Worth Owning?" The answer was no. In their latest incarnation, the funds no longer offered secure income, the analyst said. It was not clear that utilities could provide growth that would match the performance of diversified equity funds.