Utility stocks performed relatively well in the early weeks of 2016. As classic “widow and orphan” investments, these safe havens attracted money from investors spooked by the overall market selloff. But in April utilities lagged the market, perhaps because of concerns that the Fed will again raise short-term interest rates. Rising rates tend to hurt utility stocks because it makes their above-average dividend yields less compelling versus bond yields.
 
Income investors should take note of this pause in utilities’ bull run and look to pick up shares of the best utilities at attractive prices. It’s unlikely that the Fed will hike short-term rates more than once in the coming months, given the uncertain global economic outlook and the upcoming presidential election (the Fed historically has been loath to influence elections in a campaign’s final months).

#-ad_banner-#Utilities remain one of the best sources of investment income among U.S. stocks. As regulated providers of essential products and services — often as the monopoly provider in a certain area — utilities are virtually guaranteed a steady stream of cash from their customers. But the regulations also mean some utilities are restricted from investing in high-growth businesses. So rather than enticing investors with the possibility of above-average share-price appreciation, they offer above-average dividend yields.

Consider these three utilities for income and potential value today:

Dominion Resources (NYSE: D) is the #1 electricity provider in economically healthy Virginia and North Carolina and also operates natural-gas utility, distribution and storage operations in those states, Ohio and West Virginia. One of the best-run utilities in the country, Dominion has invested heavily in natural gas, both as a fuel source for power generation and via exports of liquefied natural gas (LNG) through the export facility it’s building at Cove Point in Maryland. Experts say America’s abundance of inexpensive gas will allow LNG exports to grow rapidly over the next 20 years.

In February, Dominion doubled down on its natural gas bet by announcing it would acquire Questar Corp. for about $4.4 billion in cash. Utah-based Questar is a natural gas distribution, pipeline and storage company serving homes and businesses in Utah, with some customers in Wyoming and Idaho as well. The deal will expand Dominion’s geographic reach to the West, where it will deal with relatively friendly regulators and serve fast-growing communities.

Dominion shares currently yield 4%, and that payout should rise annually as it has every year since 2004. The stock trades at a moderate 18.6 times analysts’ consensus earnings estimate for 2016. 

I initially recommended Southern Company (NYSE: SO) in September 2015, when it traded at $44.70. The stock now trades just below $50, but it’s still a solid buy in this range, especially on small pullbacks.

Soon to be the second-largest U.S. utility company thanks to the pending acquisition of Atlanta-based natural gas utility AGL Resources, Southern boasts well-regarded electric utility operations in Georgia, Alabama, Mississippi and Florida, with more than 200,000 miles of electric transmission and distribution lines. It also offers telecom services in several states, operates three nuclear power plants and, when the AGL acquisition closes, it will provide natural gas to 4.5 million customers along the East Coast.

The AGL purchase was significant, because it helps Southern shift further away from coal-fired power plants — with their heavy carbon emissions — to relatively clean and inexpensive natural gas. And as one of the largest consumers of natural gas in the country, Southern’s purchase of a major gas company is a smart strategic move.

Southern shares currently offer a robust 4.4% dividend yield backed by healthy cash flows. The company has increased its dividend every year since 2003. I look for the share price to rise steadily over the years, while dividend increases boost effective payouts for long-term investors. Buy this one and stow it away.

Xcel Energy (NYSE: XEL), which I recommended here, remains one of my favorite utilities thanks to its combination of diversified core utility operations plus its leadership in the fast-growing alternative energy sector.

Xcel serves 3.5 million electricity customers and 2 million natural gas customers in Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin. Electricity accounts for about four-fifths of the company’s revenue. 

The company’s well-diversified electricity and gas operations make it a solid investment, but what excites me even more is Xcel’s longtime status as the #1 wind-power generator in the United States. The company gets more than 15% of its electricity from wind power and plans to generate more than 30% of its power from renewables in Colorado and Minnesota by 2020. Just a few weeks ago, Xcel announced plans for a new 600-megawatt wind plant in eastern Colorado that will be the state’s largest wind farm.

Traditionally a heavy user of coal, Xcel’s deliberate push toward wind, natural gas and nuclear will help the company in two ways: by avoiding the full brunt of regulations designed to lower carbon emissions and by shifting its portfolio toward sources likely to be lower-cost in the coming years.

Xcel boasts an impressively strong balance sheet, hearty cash flow and admired management. The company has boosted its payout every year since 2004; Xcel shares currently yield 3.4%.

Risks To Consider: The biggest risk to utility stocks is rising interest rates. A spike in natural gas prices could also hurt them marginally, but note that most utilities hedge their fuel supplies for years in advance.
    
Action To Take: Buy Dominion Resources below $70, Southern Company below $50 and Xcel Energy below $40.

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