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7 Good Utility Stocks Paying Steady Dividends

Utility stocks, best-known as safe havens for dividend-conscious retirees, have been on a tear. In the year’s first three months, the Dow Jones utility average returned 16.7% (including dividends), making it the quarter’s third-best performing asset category, behind only lean hogs (35.2%) and gold (16.5%).

But the surge in utility shares means many of the stocks are now richly valued and vulnerable to a broad market correction or to a rise in interest rates. The average utility in Standard & Poor’s 500-stock index trades at 18 times estimated 2016 earnings, compared with an average price-earnings ratio of 16 over the past two years and with 17 for the S&P 500 itself, according to FactSet Research Systems. “Dividends are secure and should grow, but prices could rise and fall sharply in this environment” of ultra-low interest rates and elevated valuations, says Morningstar analyst Travis Miller.

And that means you have to take a careful look at your mission when you invest in this sector, says Katrina Lamb, head of investment strategy and research at MV Financial, a money-management firm in Bethesda, Md. If your primary goal is to generate income, these stocks can still play a role in your portfolio. With yields ranging from 3% to 4%, utility stocks pay about one to two percentage points more than 10-year Treasury bonds.

But if your primary goal is safety, you should approach this sector with caution. Because the stocks owe at least part of their popularity to a dearth of other income options, they could be more vulnerable than normal to a jump in interest rates—or even the threat of rising rates. If the stocks do sell off because of rate fears, says Miller, it could be an opportunity to snap up shares at better prices. Here are seven utility stocks worth considering.

Returns, share prices and related figures are as of April 6. P/E ratios are based on projected 2016 earnings.

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