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If you look at year to date performance, the typical defensive sectors have outperformed. While most sectors are negative for the year, healthcare is up 6.10% and utilities are up 9.17% (as of December 16, 2011).

With the average dividend yield for utilities companies at 4.72%, many income-seekers are considering investing in this sector. However, not all utilities are created equal.

As a service to my readers, I ran a screen to filter sustainably-high yielding, cheap and profitable utilities companies. This screen uses objective metrics to sort and rank stocks and is meant to provide readers a starting point that identifies companies for additional research.

Here's how I ran the screen:

Step 1: To create the base universe, I ran a screen for utilities companies with a market capitalization over $2 billion, dividend yield over 3% and a dividend payout ratio under 50%. The results of this screen are listed in the table below:

Ticker Company Dividend Yield Payout Ratio
AT Atlantic Power Corporation 8.07% 18.75%
BIP Brookfield Infrastructure Partners L.P. 5.39% 31.99%
SRE Sempra Energy 3.63% 32.71%
ETR Entergy Corporation 4.63% 41.72%
CNL Cleco Corporation 3.41% 34.55%
ENI Enersis S.A. 4.55% 36.67%
EOC Empresa Nacional de Electricidad S.A. 4.66% 39.47%
EIX Edison International 3.31% 43.05%
CNP CenterPoint Energy, Inc. 4.11% 43.12%
WEC Wisconsin Energy Corp. 3.59% 43.57%
WTR Aqua America Inc. 3.06% 45.37%
NU Northeast Utilities 3.17% 45.95%

The list above essentially shows high dividend payers with a relatively sustainable dividend. But that doesn't tell the whole story.

Step 2: I next dug into valuation of these twelve stocks by running a price-to-earnings screen. The chart below ranks these utilities companies by their p/e ratio. Of these companies, four have a p/e ratio below 10, an exceptionally conservative valuation threshold:

Step 3: To help determine if these companies were cheap for a reason, I then looked at the profitability of these four cheapest utility stocks in comparison to the industry average:

The profitability of these four companies, based on both operating margin and ROA, far out-paces the industry average. Therefore, all four companies remained in the screen. Of course, these profitability figures are backward-looking.

Step 4: Finally, to help determine the sensitivity of each company's future profitability to changes in revenues, I compared the long term debt-to-equity ratios of the four companies to that of the industry. The only company that exceeded the industry average was Brookfield Infrastructure Partners L.P.:

Bottom Line: After running the dividend, payout, market cap, valuation, profitability and debt screens above, only three utility companies appear to warrant further quantitative and qualitative investigation. Those companies are Entergy Corporation, Sempra Energy and Atlantic Power Corporation. All have good dividend yields, and are cheap, profitable and relatively financially flexible.

Of course, as with any stock screen, this only provides a starting point for research and analysis. Please provide any comments you may have on the companies in this screen.

Disclaimer: By using this site you agree to the 'Terms of Use'. This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.

Source: Screening Cheap High-Yield Utilities Stocks