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Tickers in this Article: XLU, DUK, AEP, SO, EXC
Mention investing in utilities sector at your next social get together and you might find yourself talking to a group of one. Utilities have always been seen as defensive bets, and as result usually also get labeled as stagnant investments. Yet, as the year ends, utility stocks may pose some great appeal for some investors going forward.

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The Contrarian Look
The first obvious attraction is that utilities as a group have underperformed this year. The Dow Jones Utilities Average is up 4% year-to-date against 22% for the S&P 500. Such under-performance of larger, stable businesses is often the case when markets rally strongly. In quickly rising markets, the appeal is for stocks with the greatest growth or turnaround potential as those companies, despite their quality, are the first to make a strong move upward. However, this relatively unexciting performance by utilities has left several names paying yields of nearly 5%, a payout not often seen within such a stable environment. And one day, the rally will lose its sizzle, which will likely lead to an increased attraction that stability plus a great yield provides to the utility sector. (For more, see Trust In Utilities.)

Not Without Problems
To be sure, fundamentals have not worked in the favor of the utility industry this year. First, the pain the recession has brought to many lives has reduced the demand for electricity. Secondly, natural gas prices have declined significantly, which makes it more competitive against traditional coal power and even nuclear power plants. Still, you have major utilities like American Electric Power (NYSE:AEP), now trading at 12-times earnings and yielding 4.8% respectively. Nuclear power utility Exelon (NYSE:EXC) pays you 4.2% with a P/E of 12. One of the highest yielders is Southern Company (NYSE:SO), currently yielding 5.3% but trading at 17-times earnings.

Those who wish to avoid selecting individual stocks can consider the Utilities Select Sector SPDR (NYSE:XLU), an ETF that holds all the above names and other well known names like Duke Energy (NYSE:DUK). The shares trade for nearly $31 and yielding 4.5%, respectively. (For more on this topic, check out Utility Funds: A Bright Choice In Bear And Bull Markets.)

The Bottom Line
Despite under-performing thus far in 2009, the attractive yields coupled with the inherent stability of utilities could mean even better results in 2010.

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