A utility company generates or distributes an energy source, such as water, electricity or gas. Utility stocks, the common stocks (shares) of utility companies, are famous for their high dividends, making them a favorite for retirees and other income investors. Utilities tend to pay much higher dividends than most other companies and have above-average yields and carry only moderate levels of risk.
The reasons utility companies maintain such consistently positive performances for their shareholders isn't due to market forces or uncommonly good management – at least, not directly. Utility stock privileges derive from the artificial restrictions placed on energy markets by the government. It is normally illegal to attempt to lay wire in a community where telephone services are already being offered, and the same goes for water pipes or gas lines.
Acting with monopolistic authority in their given regions or municipalities, utility companies face incredibly low elasticity of demand. Even in a country seemingly opposed to the concept of monopoly, such as the United States, this contradiction has historically been justified under the premise that too much competition in utilities would be inefficient, much like the 19th-century railroad or 20th-century airlines arguments.
Even during times of recession, households and communities still need power, water, heat and telecommunications. With minimal future volatility and very scalable services, utility companies face a lot less uncertainty than normal corporations. This means their revenue streams are extremely consistent, often resulting in steady and sizable dividends for shareholders.
(For related reading, see "Are Monopolies Always Bad?")