Water, Water EverywhereWater utilities typically offer slightly lower dividend yields than electricity providers and natural gas distributors. And with bond yields on the rise, one might think it would put them at a comparative disadvantage to other, higher-yielding utility categories. But that particular theory doesn't hold water, says David Schanzer, analyst for Janney Montgomery Scott. According to Schanzer, the water utility industry has the advantage of being able to increase its dividend payout rate to keep pace with rising interest rates, while other, more highly leveraged utilities such as electricity providers might be tapped out when it comes time for a dividend hike.
Electric Power GeneratorsDouglas Fischer, electric power utilities analyst at AG Edwards, recommends investors take "a cautious and selective approach toward the group reflecting fair to full valuations and the prospect of rising rates." But if the upcoming economic data -- especially when it comes to nonfarm payroll and jobless figures -- are not strong enough to convince the Fed to raise the overnight lending rate before November's election, then utility investors might want to stay put for a while in a less economically sensitive area of the stock market. During periods of economic growth, investors tend to turn to tech and other sectors that are leveraged to a growing economy. Utilities, on the other hand, are far from leveraged to the market, because demand for electric power does not fall drastically on the basis of economic conditions. Nevertheless, just because energy use remains steady, that doesn't mean dividends can't be cut. That has been a widespread occurrence over the last two years, after some electric utilities (such as TXU and American Electric Power ( AEP)) overstepped their boundaries by expanding into Europe and elsewhere, with disastrous results. When it comes to a safe dividend yield, David Peltier, author of TheStreet.com's SaveSafe product, says Con Edison ( ED) is the "iron man" of electric utilities, having raised its dividend 29 consecutive years. The company's 5.3% yield is also the highest in the regulated energy utility business as well as the Dow Jones Utility Index. "Con Ed can comfortably cover its dividend payment with annual earnings, and its debt is A-rated by all of the major credit agencies," says Peltier. "This streak has survived through the early 1980s, when the fed funds rate was in the double digits for three years straight; it has outlasted wars and blackouts, and it will continue on through the next cycle of expected interest rate hikes." Prudential analyst Vikas Dwivedi says Con Edison's safe but generous yield appeals to income-focused investors who were originally drawn into utility stocks after President Bush's 50% dividend tax cut in 2003.