After all of the gyrations of the market in 2011, it turns out that utilities were the best-performing sector of the S&P 500 last year, posting 15% returns. So far this year, however, utilities have missed out on the broad market rally. These stocks are down roughly 2% while the S&P has risen 11%.
But investors shouldn't forget about these dependable income stocks. In fact, I've found some utilities that yield as high as 6%, which is nothing to sneeze at. Consider the fact that stocks in the S&P 500 currently yield an average of less than 2%, while 10-year Treasuries yield slightly above 2%.
The reason utilities are off to a slow start is the unusually mild winter, which caused U.S. households to use 9% less electricity than the previous year. Lower sales squeezed utility profit margins. But the longer-term outlook of the utility sector is good. Energy demand is expected to rise, which will likely push utility stocks up. As a result, analysts expect utility sector earnings to rise an average of 4% to 6% a year, with similar growth in dividend payments.
And right now, investors can take advantage of this situation by purchasing utility stocks at discount prices while locking in exceptionally high yields and watch their dividends grow.
With this in mind, I went looking for utility stocks with strong cash flow, capacity upgrades and expansion plans in place, and generous yields. Here are three I find especially attractive...
1. Pepco Holdings (NYSE: POM)
Pepco Holdings Inc. is one of the largest energy utilities in the Mid-Atlantic region, serving about 2 million customers in Delaware, the District of Columbia, Maryland and New Jersey. Pepco supplies electricity, natural gas and energy management services to its customers.