The stock market has rebounded nicely now, thanks to the rally in oil prices and a positive set of data, particularly the jobs report that speaks of a recovering U.S. economy. Yet, investors can’t overlook the sharp sell-off seen earlier this year along with first-quarter earnings gloominess and feeble global growth. And until the 2016 presidential elections are over, volatility is also most likely to stay.

Hedge Against Uncertainty

Under such circumstances, selecting utility stocks will be a prudent choice given the sector’s defensive characteristics. Moreover, the soft approach of the Federal Reserve to rate hikes gives the utilities some respite. The Fed kept the short-term interest rate steady in the 0.25–0.50% band and indicated that only two rate hikes are likely for the year. At the end of the Federal Open Market Committee’s March meeting, the central bank announced that it now expects the federal funds rate to rise to 0.875% by the end of the year compared with its earlier expectation of 1.375% that took into account four hikes.

As a result, utilities as a whole are expected to benefit from a low-rate scenario in the near term, as higher rates would have raised their financing costs and reduced their plea as dividend investments. The sector is a safe bet providing investors with steady returns in an otherwise volatile market.

In fact, the Dow Jones Utility Average index gained 14.02% year to date compared with a 0.45% gain for the Dow and a 0.35% decline for the S&P 500. This mostly portrays the Fed's assurance that future interest-rate increases will be gradual.

Importantly, utility stocks with a low beta make for a judicious approach at this time. Beta, also known as the beta coefficient, measures the volatility of a stock in contrast to broader markets. It measures the extent to which a stock’s return may be affected or how much the price can fluctuate owing to market conditions. Stocks having a beta ranging from 0 to 1 mainly show less volatility than the broader markets.

So, risk-averse investors would prefer to neutralize losses with low correlation stocks as they are less prone to day-to-day fluctuations. For these investors, we have handpicked 4 low-beta stocks that also carry a favorable rank, making them potential investment options. These stocks carry either a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) as we expect them to outperform their peers in the future.

For further screening, investors may opt for a comprehensive Zacks Style Score or VGM score that will allow them to better choose winning stocks. Stocks with a VGM ('V' for Value, 'G' for Growth and 'M' for Momentum) score of A or B and a Zacks Rank of #1 or #2 have even better returns, on average, than if the individual components are taken into consideration, as it considers three times as many items that are correlated to future stock returns. This is perfect for investors who aren’t ready to compromise on one aspect for the sake of the other.

Our Choices

Below we have discussed four utility stocks that meet the above criteria. These stocks have a Zacks Rank #1 or 2, with low beta and a VGM score of “B”.

Based in San Jose, CA, SJW Corp. (SJW - Snapshot Report) through its subsidiaries operates as a water utility in parts of California and Texas. Its annual dividend of 81 cents a share yields an annualized 2.29% at the current share price and the stock has gained 19.6% so far this year. On Jan 27, the company hiked its annual dividend by 3 cents a share.

Zacks Rank #1
VGM score “B”.
Beta = 0.42

Headquartered in Iselin, NJ, Middlesex Water Company (MSEX - Snapshot Report), through its subsidiaries, owns and operates regulated water utility and wastewater systems serving customers in central and southern New Jersey and in the State of Delaware. The company’s top as well as bottom line grew 7.6% and 7.9%, respectively, in 2015. The company has paid cash dividends without a break since 1912 and boosted its dividend for the 43rd consecutive year in 2015. The company’s shares have gained 12.51% year to date and its annual dividend of 80 cents a share yields an annualized 2.63% at the current share price.

Zacks Rank #2
VGM score “B”.
Beta = 0.51

Edison International (EIX - Analyst Report) presents a lower risk profile compared to its utility-only peers with a strong portfolio of regulated utility assets and well-managed merchant energy operations. This utility with a market cap of around $23.12 billion has seen its shares rise roughly 20.91% so far this year, outperforming the 0.35% decline of the S&P 500 over the same period. Its annual dividend of $1.92 a share yields an annualized 2.71% at the current share price.

Zacks Rank #2
VGM score “B”.
Beta = 0.21

Tulsa, OK-based ONE Gas Inc. (OGS - Snapshot Report) operates as a regulated natural gas distribution utility in the U.S. In Jan 2014, the company was officially separated from ONEOK Inc. (OKE) and has been operating independently ever since. This January, the company declared a 5% increase in its quarterly dividend rate. This marked the second rate revision by ONE Gas since its inception and its annual dividend of $1.40 a share yields an annualized 2.39% at the current share price. This utility with a market cap of around $3.10 billion has seen its shares rise roughly 16.94% so far this year, outperforming the 0.35% decline of the S&P 500 over the same period.

Zacks Rank #2
VGM score “B”
Beta = 0.13