Investing: Utilities may ease some stock shock

— -- Your grandparents were right about a few things. It really is bad to have too much debt. Yes, Humphrey Bogart was one heck of an actor. And, no, you really shouldn't have eaten that, because you didn't know where it had been.

Your grandparents were also right when they said that utilities stocks are a good way to get current income and modest price appreciation with relatively low volatility. See? It can pay to listen to your grandparents.

Utilities stocks have long been called widow-and-orphan stocks because brokers could sell them to the most conservative investors without getting sued. And there's some truth to that: Utilities are inherently boring.

But these days, boring is better. The Dow Jones industrial average is down 7.3% this year, vs. a 5.6% gain for the Dow Jones utility average.

For one thing, utilities are very predictable. It's unlikely that we'll stop using electricity and run air conditioners on our brain waves. Furthermore, most electric utilities are closely regulated, which means that big earnings surprises — both up and down — are unusual.

Utilities are likely to get some rate increases as they replace some of their infrastructure. "There hasn't been a lot of infrastructure spending since the 1950s and early 1960s," says Tim O'Brien, portfolio manager of the Wells Fargo Advantage Utility and Telecommunications funds.

Power outages are not things that politicians like to hear about, but big building projects often make politicians happy, says Ron Sorenson, CEO of W.H. Reaves & Co. "These are big investments that create lots of jobs." he says.

And then there's yield. The Dow utility average has yielded 4.23% the past 12 months, according to Bloomberg News. The bellwether 10-year Treasury note yields 1.73%, a record low. "A 4.23% yield is more attractive than it ever has been," says Alec Young, global equity strategist at Standard & Poor's Capital IQ. And, at least for now, the tax rate on qualified dividends is 15%.

Another advantage for utilities: Let's say you asked your bond issuer to raise its payout. You'd be met by hearty laughter and a good-natured call for security.

But utility stocks can — and often do — raise their dividend rate. Consider the Southern Co. (ticker: SO), which produces and distributes electricity in the Southeast. The company raised its annual dividend by 7 cents in April, bringing the annual dividend to $1.89 a share. Ten years earlier, the dividend rate was $1.34 a share.

Finally, utilities have seen some benefit from falling natural gas prices. "Natural gas prices are very low, and supply is getting more prolific," Sorenson says. The problem, of course, is that utilities aren't exactly undiscovered. If you look at utilities vs. the broad stock market, prices are high when compared with earnings. Typically, a utility's price-earnings ratio — stock price divided by forecast 12-months earnings — is less than the P-E of the Standard and Poor's 500. By that measure, utilities are more expensive than normal.

But many people look to utilities for income, and when you compare utilities with bonds, they're cheap, O'Brien says.

If you're looking for a utility stock, bear in mind that some states have tougher regulations than others, and not all utilities operate on the same playing field. "The outlook in California is very different from the outlook in Georgia," Sorenson says.