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Turned-on Utilities

A sector historically known for income delivers turbocharged returns.

The sizzling returns of utility funds tell you that this traditionally low-key source of dividends now generates serious growth. Forces of supply and demand, which make power plants and gas pipelines more valuable, should prolong the electrifying performance.

New money will keep flowing into utilities as the economy expands and companies address the national shortage of pipelines and power plants. "There is a huge amount of catch-up investments being made, and that's leading to substantial earnings growth for utilities," says Robert Becker, manager of Cohen & Steers Utility fund. Mergers are also boosting returns. The numbers are remarkable. Over the past year to May 14, the average utility fund gained 32%. Over the past three years, the average annualized gain was 24%. Meanwhile, most utility funds' dividend yields are about 2%.

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How much juice is left in the sector? The typical electric utility now has a price-earnings ratio about equal to that of Standard & Poor's 500-stock index. Utility P/Es used to be lower than that of the SP 500, but that was when utilities were simple income stocks. Now that the industry is engaged in massive construction of new infrastructure, the case for growth is strong, says Becker. "Whether they'll continue at the same pace is tough to say, but utilities are still well positioned." Cohen & Steers expects the industry's earnings to grow 11% in 2007.

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