Utility stocks are known to be classic defensive plays when everything is going wrong in world markets.

With skittish stock markets around the world, a weak U.S. jobs report in April and unpredictability ruling the energy market, there is a cloud of uncertainty on future interest rate hikes by the U.S. Federal Reserve

This situation bodes perfectly well for utility companies as their stocks provide better yields than government securities, as well as capital protection. The sector is considered one of the safest in the equity market and is well suited for retirement investing. The strength in the sector is evident by the performance of a widely followed exchange-traded fund that tracks it: Utilities Select Sector SPDR Fund (XLU) - Get Report . This ETF has gained 14% so far in 2016.

For income investors to profit from this trend, we've pinpointed three stocks that have plenty of momentum left and can grow dividends further.

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1. Exelon (EXC) - Get Report

Chicago-based Exelon Corporation is the largest competitive energy provider in the U.S. Although the company had not increased its dividend payment since May 2013 quarter, it recently hiked its quarterly dividend to 31.8 cents a share from 31 cents. This is the first of the planned increases by the utility company, which in February decided that it would increase dividends by 2.5% each year for the next three years.

At a comfortable dividend payout ratio of 64.34%, Exelon has enough headroom to provide value to shareholders through dividend increases.

Exelon isn't standing still with its business either. The utility has said it will invest $25 billion in its six utilities over the next five years as part of its efforts to modernize the power grid, including the use of smart grid technology.

Until these efforts translate to capital returns in the future, investors can take solace in the 3.6% dividend yield the stock offers. This stock is excellent for your long-term wealth-building needs.

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2. American Electric Power (AEP) - Get Report

This utility holding company did not have an outstanding latest quarter due to unsupportive weather conditions and low power prices. Adjusted earnings per share came in at $1.02, 2 cents lower than the analyst consensus of $1.04.

However, investors have not been disappointed with the stock's almost 3.5% yield and healthy track record of growing dividends.

Also, the company is not just waiting for the storm to pass with low power prices, but it is actively making an effort to stabilize and shore up revenue and earnings, and thereby cash flows.

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In the wake of weak power prices, the Ohio-based utility is planning to spend $15 billion over a three-year period to lower exposure to merchant power operations and instead focus on regulated operations.

Further, at a forward price-to-earnings ratio of 17 vs. the industry's 18.3, American Electric is even available at a discount. This stock belongs in your income portfolio.

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3. Public Service Enterprise Group (PEG) - Get Report

Hybrid utility player Public Service Enterprise Group boasts solid financials.

Its trailing 12-month net margin at 15.8% is more than twice the industry's 7.7%, and its operating margin also significantly outpaces the industry. Public Service Enterprise also provides a superior return on assets and a superior return on equity.

The company is displaying a strong appetite for growth with increasing investments over the past few quarters. Meanwhile, the company has beat analysts' estimates in two of the past four quarters. In the most recent quarter, it topped the consensus by 5 cents.

Looking ahead, the company's rate base, the value of its core utility properties, is expected to increase by an annual compounded rate of 10% by 2018.

If the history of the company's dividend payments are any indication of future growth, Public Service Enterprise Group's trailing 12-month cash dividends of $799 million should continue to grow for years to come, providing growth and income for your golden years.

Public Service Enterprise Group has a 3.6% yield and a payout ratio of 51.32%. It can significantly and comfortably raise dividends for shareholders going forward. All in all, with a year-to-date gain of 19%, Public Service Enterprise Group presents a great opportunity for total returns.


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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.