Two Top Utility Stocks for Income Seekers

If you’re skeptical of the market’s good intentions, insulate yourself from the volatility by picking companies in steady, recession-proof industries. You can further reduce your risk by focusing on equities that throw off generous dividend yields � the “bird in hand” strategy.

Utilities fit the bill perfectly. Some with very safe dividends are paying as much as 5%�6% up front. What’s more, while traders (since the March 9 bottom) have rushed back into financials, retailers and other beaten-down stocks, they’ve overlooked utilities.

Most utility shares, electric and gas names, in particular, are only starting to make their move. So you can still buy real value, instead of playing the “greater fool” game of chasing prices higher and higher.

The Golden Rule of Growth

In the utility sector, there’s a broad rule that higher-yielding stocks harbor lower potential for capital appreciation, and vice versa.

Thus, in building a collection of utes, you want to think about your goals and needs. If you’re already retired, for example, and you’re trying to maximize your monthly income, it makes sense to tilt your purchases toward companies with higher dividend yields.

On the other hand, if you don’t expect to retire for several years (or you’re retired and your portfolio already generates more than enough income for you to live on), I advise you to lean toward lower yielding stocks.

Over the long run, five to 10 years, say, the faster growth rates of the lower-yielding companies are likely to produce a higher total return (income plus capital gains).

Let’s begin with two picks for income seekers�

Two Top Utility Stocks for Income Seekers

I project that these companies will be able to boost their dividends more or less in line with the cost of living for many years to come:

Utility Stock #1: AGL Resources (AGL)

Parent of Atlanta Gas Light, AGL Resources (AGL) distributes natural gas in Florida, Georgia, Maryland, New Jersey, Tennessee and Virginia � states with generally faster population growth than the nation as a whole.

Over the past five years, AGL has raised its dividend a handsome 53%, including the latest hike, announced in February.
However, I expect the pace to slow in 2010�2012 as the company’s ambitious construction program drains off cash.

Current yield: 6.0%.

Utility Stock #2: Dominion Resources (D)

A diversified giant with $16 billion of annual sales, Virginia-based Dominion Resources (D) generates electricity and sends it out to
both wholesale and retail customers. In addition, the company operates an extensive natural gas pipeline network, as well as gas-gathering and storage facilities.

I like D’s well-rounded profile: regulated businesses that provide stability and unregulated businesses that deliver growth. Dividends have increased 31% over the past five years.

Current yield: 5.6%.