Utility companies may not exactly be sexy, but their stocks, much like the energy they produce, are relatively reliable.
"Utility stocks are substitutes for bonds because they both pay high dividend yield," said Paul Lenz, fund manager for Rockville-based Rydex Utilities Fund. "That's a source of income to investors."
Overall, utility funds posted a return of 7.3 percent for the quarter, as of June 30. Rydex Utilities Fund, which has assets of about $81.8 million, reported a return of 8.98 percent. Lipper, a company that tracks mutual funds, ranked the fund fifth in the utilities sector as of June 28.
Lenz said he looks at three things before deciding to invest: how fast the company is growing, whether the stock is a good value, and whether investors are still interested in it.
In the past three months, long bond yields were low, meaning that utility stock prices, which move in the opposite direction of yields, were high. Lenz said the second quarter was a good time to hold utility shares.
"You want to spread your bets over many stocks that could have a chance at outperforming utility averages," Lenz said.
The dividend tax cut, which lowered the tax on dividends from a maximum of 38.6 percent to an across-the-board 15 percent in 2003, has made utility stocks more attractive, said Sam Stovall, chief investment strategist for Standard and Poor's Equity Research Services.
Another advantage of utility stocks, he said, is that they are "fairly defensive in nature."
"Investors gravitate toward utility stocks because demand remains relatively stable," he said.
Utility companies are not immune from the consolidation hitting so many sectors. Mergers are becoming more common, usually putting a premium on the stock price of the company being bought. For instance, in May, MidAmerican Energy Holdings Co., controlled by investment company Berkshire Hathaway Inc., announced that it plans to acquire PacifCorp, a subsidiary of ScottishPower, for $9.4 billion.
-- Anjali Athavaley