PINEVILLE, La. ( TheStreet) -- As 2010 approaches, investors are migrating toward cheap, dividend-paying stocks for safety. While investors are favoring Dow Jones Industrial Average components like Microsoft ( MSFT) and McDonald's ( MCD), many small-caps offer value and dividends, along with strong growth potential.

Cleco Corp. ( CNL) sells electricity in Louisiana. Its third-quarter net income surged 61% to $60 million, or 99 cents a share, but revenue decreased 30% to $242 million. Profit spreads improved dramatically, helped by a decrease in power purchased for utility customers. Cleco's gross margin rose from 16% to 25%, and its operating margin climbed from 10% to 16%.

Cleco's balance sheet has obvious weaknesses. Just $74 million of cash and a quick ratio of 0.6 demonstrate weak liquidity. While utilities often rely on debt financing, the $1.2 billion it owes translates to a debt-to-equity ratio of 1.1, which is higher than ideal. We give Cleco a financial strength score of 6.7 out of 10, less than the "buy"-list average of 7.1.

The utility's shares trade at a discount to peers based on trailing earnings, projected profit and book value. On the other hand, Cleco is an expensive investment when you consider its sales and cash flow per share.

Still, its 3.6% dividend yield is higher than the S&P 500 Index average of 2.8%. And a payout ratio of 52% suggests there's room to grow.

Cleco shares have risen 17% this year, outperforming the 14% advance of the S&P 400 Utilities Index. The stock has climbed 10% annually, on average, during the past five years, compared with a 6.1% gain for the benchmark.

Over the past three years, Cleco's revenue has decreased 5% annually, on average, but its profit has risen 18%, more than those of brand-name utilities such as Consolidated Edison ( ED) and FPL Group ( FPL).

We rate Cleco "buy."

-- Reported by Jake Lynch in Boston.

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