Retirement Q&A: Utility funds useful for income?

Utilities funds have been a haven for income investors pretty much since there have been utilities. But are they a good investment for retirees?

The answer is yes — if you're comfortable with the risk from stocks, even mild-mannered ones such as utilities.

Utilities are a group that includes not only electric utilities such as Duke Energy (ticker: DUK) and Southern Company (SO), but telephone utilities such as AT&T (T) and Verizon (VZ), as well. Because utilities often have limited growth potential, they tend to pay generous dividends. And because people usually don't go without telephone or power in tough times, they tend to be more stable than most other types of stocks.

Compared to what you can get from bank CDs and money market funds — which is to say, almost nothing — dividend payouts from utilities look pretty generous. Duke, for example, has a 4.42% yield, which is the payout over the past 12 months divided by the current stock price. Southern's dividend yield: 4.95%. AT&T and Verizon pay 5.1% and 4.2%, respectively.

Utility companies also have the ability to raise dividends, which helps investors keep up with inflation. Duke, for example, paid out a quarterly dividend of 0.245 cents per share on Dec. 16, 2010. It will pay out 0.78 cents a share the same day in 2013.

Best Oil Stocks To Watch Right Now

The drawback: They're still stocks, and they often lag when investors think rates will rise. That has been the case this year: Utility stocks have gained 13.2%, including dividends, vs. 29.1% for the Standard & Poor's 500 stock index.

And being stocks, they can lose money. The worst 12-month period for utility stocks, according to Morningstar, was in inflation-wracked 1974, when the average utility fund lost 41.2%.

A good way to start investing in utilities is through a low-cost mutual fund, such as Utilities Select Sector SPDR (XLU), which has a 1! 2-month yield of 3.84% and charges 0.18% in annual expenses. Two other low-cost utility funds:

• Vanguard Utilities ETF (VPU), 3.66%

• iShares U.S. Utilities (IDU), 3.21%.

Have a retirement question? Send it to jwaggoner@usatoday.com for consideration in a future column.

Follow John Waggoner on Twitter: @johnwaggoner.