The government bond market pays investors nothing now. The 5-Year Treasury Note, a staple for retail investors historically, pays a dismal 0.86%. The appeal of this duration would also appeal to bank certificates of deposit (CD) investors. A visit at Bankrate.com shows that the national average CD rate for a 5-year maturity is now only 1.26%.

While many investors are opting for safety at any cost, there is an army of retirees and near-retirees that are depending upon income from their life savings in order to live, and these investors are being forced to look elsewhere in predictable dividend stocks and other instruments that they feel are low in risk. Utility stocks have accidentally become the new CDs and bonds for investors due to their safety, suitability and high dividends.

Generally speaking, utilities have fairly predictable earnings and they pay out a substantial portion of their income as dividends. Some utilities now pay dividends that yield more than 4% to investors. The power companies often have local competition in their local markets now due to deregulation and the ongoing regulatory pressure of carbon emissions is actually keeping a lid on some of the upside that might otherwise be there. The trick is for investors to find the utilities where the dividend is safe even if these companies are forced to spend the collective billions due to new environmental areas.

Utilities have not been immune to the market pressure this week, but the reality is that the sector was within about 2% or 3% of the yearly highs as recently as last Friday. A 5% sell-off in the past two days may be an opportunity for those investors with long-term outlooks. The utility sector appeals to many investors looking for income, value, predictable growth, and they also classify as defensive stocks. Investors used to look for the highest yielding CDs from insured banks and savings & loans, but now that opportunity is only found in utilities.

We have compiled a list of the key liquid exchange-traded funds and a closed-end funds for investors who want diversification. We have also screened out three of the top electric utility stocks for retail investors that offer the following minimum criteria: $5 billion in market value, a 4% or higher yield, not trading at a 52-week high but also not down more than 10% from the highs (avoiding the troubled players) and which also have 10% or more upside to the consensus analyst price targets from Thomson Reuters. Lastly, we have our top water utility in America that is slightly outside of the normal utility parameters for the power generation and electric utility companies.

In ETFs and Funds, we have highlighted the Utilities Select Sector SPDR (NYSE: XLU), iShares Dow Jones US Utilities (NYSE: IDU) and the Reaves Utility Income Fund (AMEX: UTG). In utility and generation companies we have identified American Electric Power Company (NYSE: AEP), FirstEnergy Corporation (NYSE: FE) and PP&L Corporation (NYSE: PPL). In the water utility sector, we have discussed American Water Works Company, Inc. (NNYSE: AWK). What matters most here is the current situation and opportunity on each. As we always stress: understand what you are investing in!

UTILITY ETFs & FUNDS

The Utilities Select Sector SPDR (NYSE: XLU) is the key ETF for the sector. If you add up the last four payouts against a $52.25 price, you still get a 4.2% dividend yield over the past year. Its 52-week trading range is $29.45 to $34.72. Most utilities are still raising dividends and that should help that yield grow as long as the “overvalued” components do not act as drag.

There is also the iShares Dow Jones US Utilities (NYSE: IDU) ETF. With shares at $77.90, the 52-week trading range is $72.21 to $85.50 and its past four dividends generate a dividend yield of close to 3.8%.

Reaves Utility Income Fund (AMEX: UTG) is a closed-end fund rather than an ETF and at $22.60 it offers a 6% dividend yield. The Closed-End Fund Association lists its most recent net asset value at $21.32 and its 52-week range is $19.92 to $25.83.

UTILITY & GENERATION COMPANIES

Most of these utilities are down about 5% on average in the past two days. So, for the utilities worth at least $5 billion, with a 4%-plus yield and at a discount to highs and analyst targets, these are as follows:

American Electric Power Company (NYSE: AEP) trades at $36.05 after a near-3% drop and its 52-week range is $33.09 to $38.99. The company is worth some $17.4 billion and the dividend yield is currently about 4.8%. Analysts have a consensus price target of about $40.30, giving the implied upside of almost 12%. If one company is vocal about protecting dividends and about going after regulators on forced expenses, it is AEP. With estimates of $3.22 EPS for 2012, its $1.84 annualized dividend still has room to rise. AEP has been diversifying its power mix and serves more than 5 million customers in 11 states. AEP is one of our stocks to own for the next decade and it remains our favorite utility in the sector today.

FirstEnergy Corporation (NYSE: FE) trades at $42.60 after a 2% drop and its 52-week range is $35.00 to $46.51. The utility is worth about $17.8 billion and the current dividend yield is about 4.0%. The consensus analyst target is almost $47.50, implying almost 12% upside. The company is diversified in power transmission, generation and competitive electric sales serving 6 million customers in six states in the mid-Atlantic region. FirstEnergy completed its Allegheny Energy acquisition earlier this year and that is the only true barrier we see to the dividend not being raised more. The annualized $2.20 dividend compares against 2012 estimates of $3.33 EPS.

PP&L Corporation (NYSE: PPL) trades at $27.10 after a near-2.5% drop and its 52-week range is $24.10 to $29.61. The utility is worth some $15.7 billion and the current yield is approximately 4.9%. Its $1.40 annualized dividend compares to estimates of $2.47 EPS for 2012. The consensus analyst target is $30.19, implying close to 11% upside today. PP&L now serves more than 10 million customers since it has expanded in the United Kingdom and it generates and transmits power as well. We will probably not expect much in dividend news for another year or two since it has expanded via acquisition and is adjusting during this transition. PP&L is our third in line pick not just because of the alphabetic order but because of its international expansion in England.

WATER UTILITY WINNER

American Water Works Company, Inc. (NYSE: AWK) is now back around $28.50 after a 2.5% pullback. The 52-week trading range is $23.32 to $31.03, its market cap is right at the $5 billion mark today and its dividend yield is about 3%. Analysts have a consensus target of $32.44 that generates implied upside of 14% for the stock. This is one of our stocks to own for the next decade because of its geographic footprint, having local monopolies and the notion that it is the best water company in the nation. The company has recently made an asset swap and it even recently raised guidance. Its $0.92 annualized dividend compares to 2012 estimates of $1.89 EPS, leaving more room for dividend hikes in the future. This one has proven over and over that a 10% pullback is both rare and a great opportunity for investors to pile in.

So, now you have the great list of utilities and the funds and ETFs that track the sector. It was sad to see, but the implied upside threshold of 10% upside is not an easy task. Many utilities trade very close to or even above their consensus price targets. Investors want that yield and the current broad market pullback has been bloody enough that even the utilities have pulled back now. If the market slide continues, there should be no surprise that a lowering tide takes down all ships with it. Still, any big pullbacks in the utility sector should likely turn out to be better entry points for investors who have not gotten in.

This sector has been given the promise of a very low interest rate environment for years and that only gives cheaper and cheaper borrowing costs ahead. When it comes to safety, these count and they even pass the suitability standards for the “widows and orphans” classification in stocks.

Utilities have become the new CDs and bonds for investors.

JON C. OGG

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