Let's face it: The economy and the market look terrible. Things are bad and seem to be getting worse. Yet most of us still need to earn a decent return on our money in order to be able to afford to send our kids to college, retire, and provide ourselves with an income.

Sitting on the sidelines of the market for several years can really hamper your long-term returns because the returns on safer investments aren't getting the job done. Three-year CDs are paying less than 3.5% on average, and most money markets are under 3%. What can you do? Well, there just may be an answer.

What pays you in a down market?
Utility stocks have historically been a great defensive play. People still continue to use electricity and water no matter how bad the economy gets. In addition, utilities tend to pay higher dividends than other sectors. So, you get higher dividend yields that tend to be more secure because the underlying company earnings are more stable and predictable.

Utility stock prices have historically outperformed those of the general market during prolonged downswings. However, this tendency has been diminished lately because many utilities have ventured into other businesses. While utility stocks as a group used to be less volatile than the S&P 500, recently they have actually been more volatile. That being said, utility stocks can still provide investors with what they need in unpredictable markets.

What can dividends do for you?
The key is a consistent, high-paying dividend. No one knows what the market will do next. But, even if the market tanks after you buy utility stocks, you can wait for prices to return while earning perhaps 4%-6% on your original investment. If the market goes sideways, you still get paid. And, if and when the market takes off, you're positioned to participate in the stock appreciation as well as the dividend.

A great place to search for promising stocks is Motley Fool CAPS. Stocks with 4- and 5-star rankings by the 110,000-plus members in our CAPS community have had phenomenal returns. The chart below illustrates five highly rated utility stocks with qualities that should enable them to maintain high dividend yields into the future.

  • A dividend of at least 4%
  • A three-year EPS growth rate of at least 10% (companies with growing earnings)
  • A return on equity of at least 10% (companies operating efficiently)


CAPS Rating (Out of 5)


Dividend Yield

EPS Growth Rate (Past 3 Years)

Return on Equity

Consolidated Edison (NYSE:ED)






Veolia Environment ADS (NYSE:VE)






Huaneng Power International (NYSE:HNP)












Amerigas Partners (NYSE:APU)






Source: Motley Fool CAPS

All of these stocks are near their 52-week lows. Collectively, they pay an average dividend of 6.26%. Remember, though, that this is not a recommendation but rather a few quick facts that can invite further research.

Consolidated Edison
ConEd provides electric, gas and steam primarily in New York City and Westchester county. Highly rated CAPS player ChrisGraley calls ConEd the "cherry of utilities" and says at this price the stock is "simply free money".

Veolia Environmental SA
This France-based company is the world's largest water utility and should benefit from Europe's estimated $600-700 billion water investment over the next 20 years. Most of their business is outside France.

Huaneng Power International
Huaneng generates and sells electric power to companies in China. It is the largest power provider by capacity in China and they've recently expanded into Singapore.

OGE Energy
OGE Energy is an Oklahoma-based provider of both electricity and natural gas in the South Central U.S. The company is also expanding into wind energy in a big way. The future of wind energy could be quite bright.

Amerigas Partners
This company is a retail propane distributor with customers in 46 states. You have to love the massive 8.5% dividend on this. As long as they maintain the dividend, this is a great holding.

If you want to play the sector as whole, ETFs are a great way to do it at minimal expense. For example, the Utilities Select Sector SPDR (AMEX:XLU) holds stocks of 31 varying kinds of utility companies and it currently yields a little under 3%. Also, iShares DJ Utility Index (AMEX:IDU) tracks the Dow Jones Utility index.

Hitting singles during down markets can have just as positive of an impact on long-term wealth accumulation as hitting home runs during raging bull markets. It's just less glamorous. But then again, these aren't glamorous times.

For more research on these companies, check out the free CAPS site.

Huaneng Power International is a Motley Fool Income Investor and Motley Fool Rule Breakers recommendation.

Fool contributor Tom Hutchinson holds no financial position in any of the companies mentioned. The Motley Fool has a disclosure policy