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Utility Dividend Stocks Are Boring But Stable

 December 13, 2010 12:21 PM

When the market gets rough, people turn to the old standbys, the stocks that hold value and pay dividends in rough times. These include some stocks considered boring, such as utilities. Though they may not be the most exciting stocks in the world, there are aspects of utilities that make them very attractive, the best of which may be the dividend component.

While banks are paying out one percent or lower dividend yields, many utility stocks have yields of four percent or higher. Investors still receive these dividend payments while they are waiting for the market to rebound. However, this is only the case if the stock continues to pay dividends as anticipated and this is where utilities shine.

In their market areas, utilities usually have a monopoly. Since their cash flows are both predictable and steady, utilities do not have trouble obtaining financing and they are unlikely to experience financial issues when the economy is performing poorly. This means that while the share prices of utilities may drop, a reduction in dividends is rare. In addition, the share price will usually bounce back once the market recovers.

[Related -Market Needed a Yellen Bump and Didn't Get It.]

Investors can use tools like the free stock screener from Morningstar to find profitable and financially stable utilities that pay dividends of at least four percent. When using the tool, they should select stock grades of C or higher. Few utilities get grades as high as B when it comes to both financial health and profitability.

As a double-check mechanism, investors can use return on equity as another measure when using the stock screener. Selecting a ROE of at least 15 percent is recommended because this is the figure frequently used by money managers. Once the parameters are entered, the investor can view the results and conduct further research on the utilities listed to determine if any represent a wise investment.

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