WITH DIVIDENDS on the S&P 500-stock index now yielding only 2.06 percent -- by far the lowest ever -- should you buy higher-yielding public utility stocks for income?
Their record is not impressive. The past 12 months show the Dow Jones utility index up only 8.31 percent, while the Dow industrials are ahead 27.04 percent.
The main reason for utilities' under-performance reflects apprehension over industry restructuring and deregulation, and worries about higher interest rates.
In 1994, for example, when rates moved sharply higher, utilities suffered a 20 percent decline. But with the Federal Reserve deciding last week not to raise short-term rates at this time, utility stocks' futures may brighten.
Utilities do well when interest rates are stable or fall. Utility stocks are considered relatively safe and they provide better-than-average dividends.
In this environment, what utilities should you buy?
Gary F. Hovis, a veteran utility analyst for Argus Research Co., says investors should buy only those utilities with strong growth prospects.
"We favor high quality electrics with steady earnings gains and ability to generate a high level of cash," he explained. "Both of those characteristics lead to above-average dividend increases."
Included in Argus' "Group 1 -- High Quality" list are Allegheny Power, Consolidated Edison, Dominion Resources, DPL, Teco Energy, Potomac Electric Power and Wisconsin Energy.
Electric utilities in the above category yield 5.5 percent to 7.2 percent, more than twice the average S&P 500-stock yield.
Baltimore Gas & Electric falls in Argus' "Group 2 -- Good to High Quality" ranking. S&P says BGE earnings "should benefit from higher electricity and gas sales, reflecting a growing residential and commercial customer base." BGE now yields 5.8 percent.
Others in Group 2 are Boston Edison, DQE, Florida Progress, Northern States Power, Pacific Gas & Electric and Union Electric.
For diversification and extra-high yield, I suggest the Duff & Phelps Utility Fund. The fund sells for about $8.50 a share, yields 8.3 percent and pays a monthly dividend.
Despite the industry's current problems, I favor electric utility stocks as long-term "safe havens" with high income.
UTILITY UPDATES: BGE has raised its dividend in nine of the last 10 years. CS First Boston, in its latest "Electric Utility Monthly Review," recommends purchasing BGE.
Nancy Zambell, in "UnDiscovered Stocks," says, "Minnesota Power & Light (7.6 percent) is excellent for investors who want to capitalize on deregulation. It's the second lowest-cost electricity producer in the nation."