In the first half of 2014, utility stocks soared 17%, on average, the best performance of the 10 major US stock sectors—surprising most analysts. Those analysts expected rising interest rates to hurt the dividend-heavy sector, but instead, rates sank. So can this sector continue to shine?

Although some utilities will suffer when interest rates rise, small and medium-sized electric utilities focused on specific regions of the US will do well. This still is among the most undervalued parts of the stock market, and these companies will continue to see earnings growth as energy demand in their regions expands. The companies below, whose dividends yielded from 3.3% to 4.9% recently, likely will continue to increase their dividends.

Another plus: Small and medium-sized electric utilities are attractive takeover targets for big utilities seeking to expand. Twelve takeovers were announced in the first half of 2014, up from three for the same period in 2013.

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Great Plains Energy (GXP) supplies electricity to 830,000 customers in parts of Missouri and Kansas. Recent share price: $26.67.

Portland General Electric Co. (POR) supplies Oregon with more than 40% of its residential electricity. It will benefit from several projects including a recently completed 25,000-acre wind farm and another due in 2015. Recent share price: $33.84.

TECO Energy (TE) provides electricity to nearly 700,000 customers in Florida. It is expanding its natural gas operations with the acquisition of New Mexico Gas Co. It also has begun to ­divest itself of its coal-mining operations, which have been a drag on the stock price. Recent share price: $18.07.

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