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Fearing a Bond Bubble? Try Utilities

Stocks in this article: XLU NEIMX TEGAX AGL SCG AEP SRE

NEW YORK ( TheStreet) -- Investors seeking a steady yield, yet fear the bursting of the bond bubble, may want to plug into utility shares.

The Utilities Select Sector SPDR (XLU), which represents the 34 utilities in the S&P 500, has risen 2.5% this year, trailing the broader index's 9.3% gain. Still, most of the S&P 500's increase has come in the past two months as cheap money from the Federal Reserve has spurred investors to snap up riskier assets, leaving boring utilities stocks behind.

On the other side of the ledger, bond buyers who would potentially be attracted to utilities yields -- the Utilities Select Sector SPDR yields 4% compared with a 2.6% payout for the 10-year Treasury -- have been hesitant to leave the supposed safety of government securities for equities even after an unprecedented run-up in bond prices.

"Utilities tend to pay good dividends, while bonds will continue to pay low yields in 2011," says Harvey Neiman, manager of the Neiman Large Cap Value Fund (NEIMX). "Additionally, energy costs will remain high for the foreseeable future, which will translate into higher revenue as most public utilities operate as regulated monopolies. Their customer base is a captive audience."

Says Peter Zuger, who helps manage the Touchstone Mid Cap Value Fund (TEGAX): "In these turbulent times characterized by very low interest rates, utilities offer a portfolio the anchor of downside protection coupled with dividend yields that are very competitive with fixed income securities."

TheStreet searched for the market's top utilities with the help of Neiman and Zuger.

AGL Resources (AGL)

AGL Resources owns natural gas distributors serving the Atlanta area, as well as parts of Virginia, New Jersey, Tennessee and Florida. In total, the company has 2.3 million customers in six states. AGL also owns Houston-based Sequent Energy Management, an asset manager serving natural gas wholesale customers throughout North America, and a majority stake in the SouthStar partnership, which markets natural gas to consumers in Georgia under the Georgia Natural Gas brand. The company owns and operates natural gas storage facilities in Louisiana and Texas.

"This stock trades at a discount to its gas utility peers and offers a moderately growing 4.5% dividend yield," Zuger says. He adds that there's a Georgia rate order that grants the company a $26.7 million increase applicable to its distribution company effective this month.

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