With the market getting a little bumpy, this may be a good time to take another look at utility stocks.

Although many consider them boring, there’s a lot to like about utilities. For starters, many pay substantial dividends. Those payouts look especially attractive now. Here’s why.

Why Dividends?
As you probably know, dividends are regular cash payouts that you receive for simply owning a stock. Many utilities are paying dividends equating to 4% or higher yields compared to the 1% or so that banks are paying these days (your dividend yield is the dividends that you receive over the next 12-months divided by the price that you paid for the shares). 

Even if the market dips, you’ll still receive your dividends while you wait for the market to recover. That only works, of course, if your stock continues to pay its dividends as expected, and that’s the advantage of buying utilities. 

Why Utilities
Utilities typically enjoy monopolies in their market area. Since they produce steady and predictable cash flows, it’s easy for them to get financing and most are unlikely to face financial problems in an economic downturn. For those reasons, dividend cuts are rare. While utility share prices will probably drop with the market during a downturn, they usually recover when the market revives.

MStar's Free Screener
I used Morningstar’s free, user-friendly stock screener to search out four financially solid and profitable utilities paying 4.5% or higher dividend yields. I’ll give you the list in a minute, but first, I’ll show you how to set up the screen so you can run your own search.

If you’re not familiar with the term, a stock screener is a program that you can use to search out stocks meeting your specific requirements. Get to Morningstar’s screener from its homepage (www.morningstar.com) by selecting Stocks, and then Stock Screener in the Tools section.

Pick Strong Utilities
Start by selecting Utilities from the Stock Sector dropdown menu. Next, we’ll use Morningstar’s profitability and financial health stock grading features to pick high-rated utilities in those categories. Morningstar grades stocks from A to F, where A is best.

In theory, Morningstar grades each stock in comparison to other stocks in the same industry. But in fact, few utilities rank as high a B in both the profitability and financial health categories. Thus, I only required C or better grades for both.

To be on the safe side, I also used return on equity, a standard profitability gauge that can be applied to stocks in any industry, as a double-check. Return on equity compares the last 12-month’s earnings to shareholders equity (book value). Many money managers won’t consider stocks with ROEs below 15%, and that’s the value I specified for this screen.

High Dividend Yields
Finally, since dividends are the point of this exercise, I selected a minimum 4% dividend yield.

That’s it. Select Show Results to see the list of passing stocks.

Results
When I ran the screen, only four utilities passed the test.

•  CenterPoint Energy (CNP): an electric and natural gas utility serving  Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma, and Texas. Estimated dividend yield 5.6%.

•  Dominion Resources (D): an electric and  natural gas utility customers in 12 states in the Midwest, Mid-Atlantic and Northeast regions. Estimated dividend yield 5.0%.

•  DPL Incorporated (DPL): an electric utility serving West Central Ohio. Estimated dividend yield 4.6%.  

•  Public Service Enterprise Group (PEG): an electric and natural gas utility serving the Northeastern and Mid Atlantic areas. Estimated dividend yield 4.5%.

Since expected dividend yields change every time the share price moves, you may see different yield numbers when you run the screen. If your screen lists more than five or six utilities, click on the Dividend Yield column header to sort the list with the highest yielding utilities at the top. All else equal, go for the highest payers.

As is the case for all screens, consider the results a list of candidates worthy of further research, not a buy list. The more you know about your stocks, the better your results.

published 2/14/10