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Tickers in this Article: XLU, LNT, DUK, SO, ED, GXP, CEG, AEE
Nothing could be more recession-resistant than flipping on a light switch. After all, people still need to heat their homes and run their appliances, regardless of how the economy is doing. For that reason, utility stocks, often seen as boring, pay out steady streams of dividends to golf-playing retirees. In today's marketplace, however, many of these companies are paying above-average dividends, even by utility standards. The SPDR Utilities Select Sector ETF (NYSE:XLU), the most popular traded index fund for the sector, currently yields around 4.3%.

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Dividends Or Dividend Traps?
While the sector is considered a safe haven for income investors, a few higher yielding utility stocks have slashed dividends recently. Great Plains Energy (NYSE:GXP), Ameren Corporation (NYSE:AEE) and Constellation Energy Group (NYSE:CEG) each cut dividends by at least 40%. The culprit? High debt and falling profits. As a sector, utilities often take on high amounts of debt to fund infrastructure projects. New power plants and transmission centers are extremely costly. Alliant Energy Corporation (NYSE:LNT) estimated recently that construction of a new 300-megawatt coal plant - big enough to power only 150,000 homes - would cost more than $1.2 billion. As the capital markets have become increasingly constrained, even utilities are having trouble rolling over short-term debt. (Learn more about finding stocks with a stream of income in Stock-Picking Strategies: Income Investing.)

Utility Bargains
Despite the current credit mess, a handful of long-term utility bargains remain. Cash-generating regulated utilities in population-dense markets offer the best opportunities. In addition, consideration should be given to utilities that focus on energy efficiency and alternative energy.

Three Utility Stock Picks
Southern Company (NYSE:SO), which most people consider a traditional archetype utility, generates the majority of its revenue from regulated assets. The company currently produces over 42,000 megawatts of electricity for 4.3 million customers throughout the southeastern U.S. Southern Company also should benefit from its solid relationship with state regulators, as evidenced by its recent three-year rate increase deal with the Georgia state legislature. Revenue for full year 2008 increased by 11.6% to $17.6 billion, with earnings totaling $1.74 billion. Southern Company trades at a forward price-to-earnings (forward P/E) ratio of approximately 12, currently yields a market-beating 5.6% and has paid a quarterly dividend for over 60 years.

Although it carries $13 billion in debt, Duke Energy's (NYSE:DUK) debt-to-equity ratio is only 41% - quite low, by utility standards. Duke, however, has shelved a few of its plans for expansion in 2009, choosing instead to focus on its core businesses. The heavily regulated electricity businesses in the Carolinas and Midwest produce more than three-fourths of Duke's annual profits. In concert with its 35,000 megawatts of domestic capacity, Duke has an additional 4,000 megawatts of generation in Latin America as well as natural gas distribution services. The company also has a few "hobby" businesses, including a real estate joint venture and a telecommunications company. Adjusted earnings for 2008 came in at $1.21 per share and Duke Energy currently yields 6.5%.

As the old saying goes - "If you can make it in New York City, you can make it anywhere" - Consolidated Edison (NYSE:ED), with its 180-year operating history, fits the bill. ConEd serves its regulated electric and gas assets to 3.2 million customers in New York City and 1.1 million customers in Westchester county. In addition, the utility provides services to parts of Pennsylvania and New Jersey. The company recently raised its quarterly dividend payment and has done so for the past 35 years. ConEd yields 6.30% and trades at a forward P/E ratio of 8.50. (Learn how to evaluate utility companies in The Industry Handbook: The Utilities Industry.)

Bottom Line
As far as recession-resistant businesses go, those in the utility sector are among the most stable. However, the recent credit crisis has forced some of the more growth-oriented utilities to slash dividend payments in order to preserve capital and pay off debt. By focusing on some of the larger, slower growing power companies, however, investors can take advantage of market-beating dividend yields and reap the benefits of panic-created bargains.

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