ELECTRIC-UTILITY STOCKS may lack sizzle, but many sport attractively low price-earnings multiples and offer ample dividend yields.

Regulated utilities now trade for an average of 12 times projected 2009 profits, a sharp discount to the Standard & Poor's 500 stock index, which, at around 1040, fetches around 17 times this year's anticipated profits. Based on 2010 earnings estimates, the utilities' P/E multiple of 11.5 likewise is comfortably beneath the broad market's 14. Utility dividend yields average just over 5%, more than double the 2.1% of the S&P 500.

The yield spread between the utilities and the S&P 500 is near a five-year high. The utility dividend yield also stacks up well against 10-year Treasury bonds, which now yield 3.3%, and top-grade 10-year municipal bonds, now yielding 3% or less after the sharp muni-market rally this year. Dividends paid by the major regulated utilities look safe, and investors could see modest annual increases, enhancing the appeal of utility stocks relative to bonds.

Most utilities are expected to report average earnings gains of 6% to 7% in coming years -- impressive for a supposedly dull industry. Warren Buffett is a fan of the sector, admiring its predictable, if moderate, gains. One of the largest divisions within Buffett's Berkshire Hathaway (BRK.A) is MidAmerican Energy, which owns regulated utilities in Iowa and the Pacific Northwest.

Investors won't make a killing in the major utility stocks. Still, many of the shares could see upside of 10% or more in the coming year; include dividends, and the total return might top 15%. And given their defensive characteristics, utilities are apt to hold up better than the S&P if the stock market corrects.

Utilities are a contrarian investment these days. Hoping to capitalize on a recovering economy, many investors are piling into "offensive" shares in the faster-growing financial, technology and industrial sectors. Reflecting this mood, most equity strategists featured in Barron's cover story in our Sept. 7 issue urged investors to underweight utilities.

"This is not ordinarily a time to buy utilities, given the economic recovery and the associated risk of higher inflation and interest rates," says Hugh Wynne, the utility analyst at Sanford C. Bernstein. "But utility stocks may already have factored in the threat of higher rates as well as the risk of increased taxes on dividends when the Bush tax cuts expire in 2011. You shouldn't assume they will underperform." Dividends are now taxed at a favorable rate of 15%. Historically, the bulk of utility returns have come from dividends.

Wynne likes PG&E (PCG) and Edison International (EIX). To those who argue that utilities will underperform in a market rally, he and others counter that this already has happened. The Dow Jones Utility Average is up about 25% from its March low, roughly half the gain of the S&P 500. But year to date, the utility index is flat, versus the S&P's 15% rise. Stocks such as Southern Co. (SO), American Electric Power (AEP), Entergy (ETR) and Exelon (EXC) are down in 2009.

The risks to utilities appear modest, especially compared with the threats facing big telecoms, such as Verizon Communications (VZ) and AT&T (T). Most utilities are in the midst of big capital-spending programs to rebuild their power grids, construct new transmission lines and open new plants.

Utilities typically are allowed to raise electric rates to fund new infrastructure. Most state regulatory commissions agree that the companies need roughly 10% equity returns on their investments in order to keep building capacity. Power demand has dropped about 4% in the past year, owing to the recession -- but that hasn't hurt most utilities. Over time, U.S. electricity demand is likely to rise modestly, spurred by population growth, a recovering economy and increased ownership of electric cars.

There's little variation in the P/E ratios of the big regulated utilities. Companies such as Southern, Consolidated Edison (ED), PG&E, Duke and American Electric are among the safest in the group, because they get the vast majority of their revenue from regulated power operations and little from independent power divisions, whose profits swing, based on market prices for electricity. Prices have been weak because of the recession, a cool summer in much of the country and falling natural-gas prices.