PICK MIDDLE-OF-THE-PACK UTILITY STOCKS OVER BONDS, 13-YEAR REVIEW SUGGESTS

In this summer of swooning markets, what possible incentive could a conservative, income-minded investor find to consider venturing into stocks?

Not much, it would certainly appear, if the subject in question is "playing the market" in the hope of fun and profit. Such rewards have been in very short supply of late, and the risks that go with them have been painfully plain to see.But with a different objective, and a correspondingly different strategy, the picture looks less grim - at least as it is painted by an analyst at the nation's largest investment advisory service.

Milton Schlein, associate research director at the Value Line Investment Survey, set out to compare the relative merits of bonds and electric utility stocks, two popular vehicles among investors seeking a steady stream of income from their savings.

The two have much in common - including relatively generous yields and a tendency to rise or fall in price mainly in inverse reaction to the ups and downs of interest rates.

But after examining the behavior of these two species over the past 13 years, Schlein finds enough disparity in their performances to draw this conclusion: "History suggests that utility stocks have been superior total return holdings to bonds whether rates were going up or down."

The 1977-89 period Schlein chose for his study witnessed a wide variety of financial environments: An upsurge in interest rates and inflation (from '77 to '81); a sharp decline in rates (between '81 and '86), and, most recently, a protracted stretch of relatively stable rates.

In both the rising-rate and falling-rate environments, he found, utility stock prices fared significantly better than those of bonds. Since 1986, he said, the performance of the two has been about equal.

The utilities' biggest advantage, Schlein says, seems to be increases in their dividends, which give them a measure of inflation protection that isn't available with the fixed interest payments made on bonds.

In addition, he observes, utility stocks aren't encumbered by what he describes as two restraints on the appeal of bonds.

Many bonds come with call provisions that allow their issuers to buy them back at specified times. In addition, bonds typically have a specified maturity date when they are redeemed for their face value in cash.

Both these characteristics limit the appeal of a good many bonds as a means of "locking in" yields for an extended period of time.

On the other side of the ledger, utility-stock yields aren't as secure as those of bonds. A utility that runs into trouble is almost certain to lower or eliminate the dividend on its stock before it would take the more drastic step of interrupting its contractual interest payments to bondholders.

And some utilities do get into trouble, as witness the many cases in recent years of problems at nuclear power projects.