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Utility stocks and Treasury bonds have long battled for the attention of income-seeking investors. Both groups have formidable weapons in their command.

Ten-year Treasury notes offer a risk-free income stream and less price volatility than most stocks. Utility stocks typically offer solid dividends and the possibility of moderate share-price growth.

Yields on both utility stocks and T-notes have fallen by about 50% since the start of 1995. But with a few short-lived exceptions, the 10-year Treasury bond has delivered higher yields than the average utility stock. Since 1995, the T-bond has averaged a 5.2% yield, while the average utility has yielded 4.3%.

But investors troubled by weakness in dividend-paying stocks and worried about the credit quality of corporate bonds have flocked to the safety of the T-note. The resultant increase in bond prices has caused the yield to fall to 3.33% from 4.03% at the end of 2007 and the five-year high of 5.32% reached the previous June.

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Utility yields have risen as stock prices have fallen. The S&P; 1500 Utility Sector Index has dipped 11.5% this year. For the first time since 2003, the average utility's 3.8% yield is above that of the T-note. Yields of high-quality corporate bonds have also declined, though they remain well above utility-stock yields. Corporate bonds with a Moody's (nyse: MCO - news - people ) rating of triple-A average a yield of 5.35%, about 1.6% higher than the average utility stock, a smaller spread than the average over the last 15 years.

With the exception of water and hybrid utilities, every industry within the utility sector averages a higher yield than the Treasury note, and all but hybrids yield more than they did a year ago. Electric utilities lead the pack with an average yield of 4.3%, up from 3.4% a year ago. On average, utilities return 60% of their profits to shareholders via dividends.

Utility yields are still below historical averages because of the strong performance of the stocks in recent years, but income-seeking investors should check out our Top 15 Utilities Portfolio. Those utilities average a yield of 3.6%, slightly below the average utility, but offer superior growth potential.

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Among our top 15 utilities, nine now yield more than the 10-year Treasury note. Three of those with lower yields are energy/utility hybrids that offer growth opportunities far above that of the typical utility.

Below, we feature three stocks from the Top 15 Utilities portfolio with attractive yields.

AGL Resources (nyse: ATG - news - people ), a natural-gas distributor on the East Coast, operates six utilities in states from Florida to New Jersey, as well as Tennessee, serving about 2.3 million customers. Non-regulated businesses contributed 27% of 2007 operating profit and should also account for much of AGL's growth over the next several years, with the natural-gas storage business looking particularly attractive.

Losses in the energy-marketing and services business led to flat profits and a 1% decline in revenues last year. However, business should start picking up in 2008 and could do much better in future years. Consensus estimates project 4% growth in AGL's per-share earnings this year. Higher capital expenditures in 2008 will slow profit growth in the near term, but should lay a foundation for growth down the road. Golden Triangle, an AGL subsidiary, will likely begin construction on a natural-gas storage facility in Texas this year. One cavern could open in late 2010, with another ready in 2013.

With a Quadrix value score of 75, AGL trades at just 12 times estimated 2008 earnings, compared to an average of 14 for gas utilities. AGL, with a dividend yield of 4.9%, earns an A rating in our utility update and a position in the Top 15 Utilities portfolio.

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In the first year since spinning off its natural-gas pipeline and energy-exploration businesses, Duke Energy (nyse: DUK - news - people ) has laid the groundwork for fairly steady per-share earnings growth in the mid-single-digits over the next five years. The company is building new coal-fired power plants in North Carolina and Indiana. Duke also filed an application in December 2007 to build a nuclear power plant in South Carolina.

Duke is reaching beyond traditional, fossil-fuel power generation. The company bought 100 wind turbines from General Electric (nyse: GE - news - people ) in December 2007 and purchased wind-power assets from Tierra Energy earlier in the year. By the end of 2008, Duke plans to have three renewable energy projects running in Texas and Wyoming. Duke has more than 2,500 megawatts of wind-power projects in its pipeline, roughly equal to 30% of the company's current commercial generation capacity. The commercial power business should be a major driver of profits in future years.

After several years of divestitures and the purchase of a large electric utility, Duke looks a lot more like a traditional utility than it did a few years ago, though it still holds a stake in a real estate business. Duke, yielding 4.9%, is in our Top 15 Utilities portfolio.

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WGL Holdings (nyse: WGL - news - people ) operates a gas and electric utility in Maryland, Virginia, and the District of Colombia. The company boosted its dividend nearly 4% in early March, marking the 32nd consecutive annual increase and the largest percentage increase in at least 15 years. WGL intends to continue growing its dividend at a 3% to 4% rate.

Also in March, WGL raised its estimate for per-share earnings growth to 6% to 8% a year over the next five years, up from 5%, citing cost savings and customer growth. A new outsourcing arrangement with Accenture (nyse: ACN - news - people ) should allow WGL to cut 300 jobs and save roughly $170 million over the next 10 years.

This year, WGL expects to draw in 14,000 customers, expanding its customer base by a solid 1.4%. The customer base increased nearly 2% last year, but the housing-market meltdown is slowing growth a bit so far in 2008. Over the next few years, WGL's customer base should grow at a 2% to 3% clip. In the December quarter, WGL received rate increases totaling about $26 million a year, which equates to about 1% of annual sales.

The stock has held up well this year, falling 2.8% in contrast to the S&P; 1500 Utilities Sector Index's 11.5% decline. WGL has delivered one of the best year-to-date performances among components of the Top 15 Utilities portfolio, a fact reflected in its Quadrix performance score of 78. WGL earns an A rating in our utility update.

Excerpted from the March 31 issue of Dow Theory Forecasts. Click here for more stock analysis and recommendations from Editor Richard Moroney.

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