A wealth of power, light, water.

After its stall earlier this year, Wall Street's bull market was charging again by the end of the first quarter. The Dow Jones Industrial Average forged into record territory beyond the 3,300 mark propelled by a demand for cyclical issues, strong corporate earnings and a cut in interest rates. Experts predict it could hit 3,800 after the fall presidential election.

The downside is that dividend returns have been flat, says Robert Mescal, a research analyst at the Institute for Econometric Research in Fort Lauderdale, Fla. "Stock prices are still too high (the average price/earnings ratio for the Standard & Poor's 500 is 27) and dividend growth is around 2.8%," he says.

Investors who buy today's high-yielding stocks with little potential for future dividend growth won't go too far. Big gains with less risk can be made in stocks that have exhibited steady earnings and dividend growth over the years.

At one time, you could look to utilities as one of the best capital investments--they were high-yielding, yet safe. But these days, that market trend is rather nebulous. The Dow Jones Utilities Average (composed of 15 major utility companies) was up 7.84% at year-end (Dec. 31, 1991). But by the end of the first quarter of 1992, the Dow Jones Utilities Average was down 9.08%.

Like bonds, utilities run counter to prevailing interest rates--as interest rates fall, their prices rise. But unlike bonds, whose interest payments stay the same until maturity, the dividends of high-yielding utility stocks tend to grow if the company's earnings grow. "If a utility's earnings grow 1% to 2% higher than inflation, dividend increases should be attractive," says Pierre Dunagan at Dean Witter Reynolds Inc. in Matteson, Ill.

Public utilities are predictable. They are heavily regulated and restricted in the services they provide and the rates they charge customers.

Again, the primary aim of investing in utilities is to receive steady dividends. For instance, if a utility company's shares ranged in price from $34.75 to $26.12 for the year, and its yield was about 7%, the 33% price swing could make investors sqeamish. But investors will feel a lot better when they collect the dividends.

Those companies that raised their dividends for the first quarter of 1992 were Wisconsin Energy, Texas Utilities, Consolidated Edison and Detroit Edison.

The Line On Telephone Stocks

Utilities fall under four basic categories: communications, electric, water and natural gas companies. Of all the major utility sectors, telephone companies now offer the brightest prospects for increasing wealth, says Richard Band, financial analyst and editor of Profitable Investing, a Potomac, Md.-based newsletter. Phone companies are among the safest of all stocks. "What business can function without a phone?"

Second, telephone companies historically yield more than money-market funds and are among the most consistent dividend payers. Last March, telephone stocks were yielding 5.52%. Moreover, fax machines and computers boost telephone companies' profits.

New York City-based Standard & Poor's Corp. says through 1997, industry earnings should expand roughly 5% to 7% per year reflecting demand for communications services, increased revenue from telephone services and growing cellular customers.

Look for phone companies that are taking advantage of emerging markets, says Patrick Prioleau, president of Andrew Morgan Prioleau Financial Services Co. in Chicago. For instance, "Bell Atlantic recently purchased Metro Mobile, giving it access to the highly profitable portable phone business."

Of course, the 1982 divestiture of American Telephone & Telegraph Co. (AT&T) broke up Ma Bell into one high-tech communications concern and seven regional Baby Bells--giving investors more telephone utilities to choose from. AT&T is strengthening its market in networking, data processing and financial services with its Universal revolving credit card. The nation's largest long-distance carrier had a strong first quarter as profits grew 16.6%.

However, not all telephone companies are a sure bet. Prioleau says avoid telephone companies whose primary focus is on telecommunications, "because they won't provide immediate growth potential. Moreover, their dividends are not high enough to carry income-oriented investors to prosperity."

Tapping Into Electric, Water And Gas

As a whole, electric utilities have not had stellar earnings or dividends this year. However, individual companies will do well, says Helene Phillips, S&P Corp.'s utilities-electric analyst.

Electric utilities that Phillips is fired up about are: Central & South West, Duke Power, Entergy Corp., NIPSCO Industries, Pacific Gas & Electric and Wisconsin Energy.

Thanks to a steady upturn in water consumption, water utilities offer long-term, steady income and potential profit. Typically, investors can expect annual increases in water company revenues and earnings no matter how bad times get. Although their yields are not as generous as other utilities, dividend increases have averaged around 10% a year. Companies worth looking at include American Water Works, Southern California Water and United Water Works.

A relatively mild winter provided few profit opportunities for natural gas companies. The industry average is around 6%. Still, 80% of Americans use gas daily, so, the industry remains strong. Moreover, gas utilities provide attractive returns and are known for increasing dividends.

One company that is worth eyeing is Atmos Energy, suggests Prioleau. "They recently increased their rates, which will probably cushion any revenue losses from last winter." Also a favorite of Prioleau's is Brooklyn Union Gas Co. Aggressive investors may want to consider Columbia Gas, which is in bankruptcy and has eliminated its dividend for now. But the company is expected to get out of Chapter 11 in another year and could provide huge rewards, Prioleau says.

Generally, before you invest a dime, you want to make sure the company is strong financially, says Dunagan. Pay close attention to basic balance sheet items (such as debt as a percentage of capital), which can be easily determined from annual reports.

Another way to evaluate utilities is to look at the payout ratio--the percentage of the company's profits that is paid out as common dividends. If the current dividend of the utility is no more than 60% of available cash earnings, that may indicate that there is room for future dividend growth.

Since utilities provide the necessities for everyday living and do not readily decline during periods of stock market and economic uncertainty, utility companies still make for defensive stocks.