Investing Topics: Defensive Stocks

The Environmental Protection Agency's ongoing crackdown on carbon dioxide emissions from coal-fired power plants continues to dominate the headlines. But investors shouldn't overlook the importance of utility-regulator relations at the state and local level.

Utilities pay some of the safest and highest dividends on Wall Street. But they’re stocks, not substitute investments for bonds.

Those who’ve tried to treat them like bonds have consistently underestimated their returns in bull markets, as well as downside in bear markets. Similarly, those who’ve bought when interest rates were falling and sold when rates have risen have routinely paid too much and sold too cheaply. And occasionally as in 2008, they’ve had their heads handed to them.

Big picture themes always grab investing headlines. Success, however, flows from knowing what’s up with individual companies.

Regulated water utilities, for example, are on their face the very simplest and uniform of businesses. Yet so far in 2013, returns from the 10 companies I track in the Utility Report Card have ranged from a 26 percent gain to barely breaking even.

Verizon Communications' (NYSE: VZ) second-quarter results demonstrate why its stock trades at a premium, but investors should wait for a pullback before adding to their positions .

Utilities and essential services stocks are known for their long-run stability—both all-weather business strength and low share price volatility. But even they pale before the unmatched reliability of utility bonds.

The recent pullback in shares of Southern Company (NYSE: SO) represents a buying opportunity.

The pullback in master limited partnerships after the Federal Reserve announced plans to scale back quantitative easing gave investors an opportunity to buy Kinder Morgan Energy Partners LP (NYSE: KMP) at a favorable price.