Utility stocks are generally considered conservative investments that reward shareholders over the long term with sizable dividends that grow slowly and steadily over time. With the S&P 500 Index's yield hovering around 2%, the bar for yield is set pretty low today. That said, investors should think twice before jumping at utilities like UGI Corporation (UGI -0.39%), Atmos Energy Corporation (ATO -0.76%), and MGE Energy, Inc. (MGEE -0.50%), which offer little if any yield advantage over an S&P 500 Index fund.

1. Nothing to write home about

UGI is a diversified utility with operations in natural gas, electricity, and propane. The company has performed well this year, with earnings up 11% in the fiscal first quarter, 29% in the second, and flat year over year in the third because of a reserve related to tax code changes (earnings would have nearly doubled otherwise, according to the company). UGI expects adjusted earnings to advance by as much as 20% in fiscal 2018.   

A man holding blueprints with a high voltage power line behind him

Image source: Getty Images.

These are impressive numbers. And the future looks pretty good, too, with the company earmarking 70% of free cash flow over the long term to capital investments and acquisitions. That, it projects, should support roughly 6% to 10% earnings-per-share growth over time. But, here's the trouble: The goal for dividend growth is 4% -- just one percentage point higher than the historical rate of inflation growth. That wouldn't be so bad if UGI's yield weren't a paltry 1.9% today, roughly what you could get from an S&P 500 Index fund.   

UGI has increased its dividend annually for 31 years, which is impressive, but if you are looking to generate a substantial and growing stream of income from a utility investment, UGI isn't the answer.   

2. Focused, but falling short

Atmos Energy is a pure-play natural gas company, with utility operations in eight states and a midstream natural gas pipeline business. Like UGI, Atmos has been doing pretty well so far in fiscal 2018, with adjusted net income per share results through the first three quarters higher by 10%. Full-year adjusted earnings are expected to be as much as 12% higher, year over year, in fiscal 2018.   

UGI Dividend Yield (TTM) Chart

UGI Dividend Yield (TTM) data by YCharts.

Atmos is spending for the future, too. In fiscal 2018, it plans to invest $1.4 billion in its regulated and midstream businesses. It expects to spend over $6 billion on capital projects between 2019 and 2022, supporting earnings growth of 6% to 8% a year. Dividends are projected to grow along with earnings. The only problem is that Atmos's dividend yield today is just 2% or so. Dividend growth will beat inflation, but that's not enough, here, given the low starting yield. Atmos has a great dividend history (with over three decades of annual hikes), but its yield is toward the low end of the utility industry, and the stock is not a great option for income investors.   

3. Reliable, but small

MGE Energy is a relatively small electric and gas utility located in Wisconsin. Through the first half of 2018, earnings have advanced a solid 9%. The company plans to spend an average of $120 million or so annually on capital projects, roughly double its depreciation expense, between 2019 and 2021, to continue to drive growth. (Spending in 2018 should be around twice that level because of an acquisition.) That spending is grounded in the company's plan to displace coal (which was 53% of its generation in 2017) with clean power. The goal is to take carbon-free power, like solar and wind, from 12% to 25% of the generating mix by 2025.   

Although the company doesn't provide projections, the spending it has planned should support continued top- and bottom-line growth in the years ahead. And that should mean higher dividends, too, with management recently noting its commitment to the dividend, which has been increased for 43 consecutive years. The most recent increase, though, was just 5%. That's above inflation, but not by a huge amount. And for income investors, that relatively modest growth coupled with a roughly 2% dividend yield just doesn't add up to a good investment option.   

Look for better options

There's nothing inherently wrong with UGI, Atmos, or MGE. Each of these utilities is performing well today and appear to have solid plans to invest in their businesses for the future. That should lead to higher earnings and dividends over time. However, each has a yield that's hovering around 2%, and their dividend growth outlooks don't stand out when compared to other utilities. Income investors should look for other options in the utility space.