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By Christine Benz | 09-09-2010 01:35 PM

Any Attractive Utilities?

Morningstar's Josh Peters outlines the dividend-seeker's key criteria for utilities stocks and some favorites for your watch list.

Christine Benz: Hi, I am Christine Benz for Morningstar.com.

Utility stocks have historically been a source of rich dividend yields, but are they worth investing in right now?

Here to discuss that question with me is equity strategist and editor of Morningstar DividendInvestor, Josh Peters.

Josh, thanks so much for being here.

Josh Peters: Happy to be here, Christine.

Benz: So, let's discuss the lay of the land for the utility sector. Give a sense of what that investable universe is like for dividend-seeking investors.

Peters: Well, the industry really comes down into a couple of buckets that I think are very important to recognize before you start looking at the industry.

One group that I think most dividend investors probably won't find a lot of appeal in is the merchant energy sector. These are companies that are operating power plants and just selling whatever electricity they produce on the open market. It's a very volatile business, because energy prices in and energy prices out may not be correlated; profit margins can fluctuate widely--not such a great business.

At the other end of this spectrum, you have what are called T&D utilities, transmission and distribution utilities. These are the companies that actually will deliver electricity and natural gas, in some cases water, directly to your house or your business. That tends to be a very stable monopoly business. It's heavily regulated, but if you have the right combination of regulation and management in the company, you may be able to have a pretty good total-return profile.

And then there's sort of a mixed group of companies like Exelon here in Illinois that own both merchant power plants as well as traditional transmission and distribution operations.

Benz: So, say, I am looking at the sector and assuming I understand the various sub-sectors, what do I want to look at when evaluating one of these companies in addition to what its dividend yield looks like?

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