One of the best-performing sectors in 2016 is utilities, with the Dow Jones Utility Average up more than 13%, easily outpacing most market benchmarks, observes Chuck Carlson, editor of DRIP Investor.

The utility stocks are benefiting from a number of factors:

* The group’s defensive characteristics were in demand given the market’s volatility this year, especially in the first five weeks of the year when the broad market was getting hammered.

* The expectations for higher interest rates have ebbed. Dovish talk on rates is a positive for the group.

* For investors in search of yield, utilities offer an attractive landing spot. 

To be sure, the group’s strength this year has stretched valuations in the sector and if the broad market continues to rally, it is likely utility stocks will lag on the upside.

Nevertheless, that doesn’t mean investors should dump their utilities. The stocks still offer good income.

Furthermore, if the market weakness that hurt stocks at the beginning of this year returns, utilities should provide some ballast to portfolios.

The premium valuations in the sector do make it imperative that investors focus their utility holdings on the highest-quality plays in the group, such as these two favorites.

NextEra Energy (NEE)

NextEra Energy offers electric service to more than nine million
Floridians. The company generates more electricity from the wind and the sun than any other company in the world.

The stock currently yields 3%, and dividend growth should be above average for the group.

I like the growth potential of the company’s service region and its clean-energy business — a business that increases the stock’s appeal across a broader range of investor constituencies, including socially responsible investors who typically eschew utility companies.

NiSource (NI).

NiSource, headquartered in my backyard in Indiana, serves 3.4 million natural gas customers and 463,000 electric customers in Ohio, Pennsylvania, Virginia, Kentucky, Maryland, Indiana, and Massachusetts.

The company has beaten consensus earnings estimates in each of the last two quarters.

The current yield of 2.7% is on the lower side for the group but reflects the firm’s above-average earnings growth potential for the group and good dividend-growth prospects.

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By Chuck Carlson, editor of DRIP Investor

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