Founded in by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. Everyone knows dividend-seeking investors like top utility stocks. But if interest rates keep rising, what would it mean for the relative attractiveness of their dividend yields? That said, here's an analysis of the best utility stocks to buy. Before we go any further, here are a few cautionary words on interest rates.

If you know where interest rates are headed, you can make significantly more money than you ever could on equities. The point of this exercise is to understand the risk in your utility stocks from exposure to rising interest rates, in order to better balance your portfolio.

For example, you could buy some stocks that benefit from higher interest rates in order to diversify risk.

To flesh out these points, first consider that a jump in the 10 year treasury yield of 2. As you can see the data is a pretty good fit and suggests as rates rise the market will demand a higher dividend yield. Although it's far from an exact correlation, a look at the chart of the U. Treasury's year yield, compared to four of the largest utilities listed -- NextEra Energy, Inc. NEE , Duke Energy Corporation NYSE: DUK , Dominion Resources, Inc.

D , and The Southern Company NYSE: SO -- shows how closely related utility yields and interest rates are:. What this means to you is that as interest rates rise, utility stocks are likely to fall in price because investors deem their dividend yields less attractive. Indeed, in the last month, the yield on the year Treasury has jumped from around 1.

Utility Stocks Are Undervalued - Barron's

ES data by YCharts. In order to test for these qualities, I've compiled the following table. The "R" column represents the rate of return on the stock implied by the current stock price; a higher number is better. It's generated using the Gordon growth model , with calculations based on dividend, price, dividend growth-rate potential, and year average return on equity. Here's how it breaks down: D is dividend, P is price, G is dividend growth-rate potential, and ROE is year average return on equity PCG and Duke Energy Corporation.

Financial leverage is simply a measure of how a company's EPS earnings per share changes in relation to its EBIT earnings before interest and taxes ; a high number implies a company has been building up debt in order to generate earnings growth. For these reasons, Dominion Resources and PPL Corporation NYSE: PPL don't make the cut.

The final test compares debt to shareholder equity; a higher ratio is bad. For this reason, The Southern Company and NextEra Energy get the axe.

Now Is Not the Best Time to Buy Utility Stocks

All of this leaves Eversource Energy NYSE: ES as the best all-round pick of the stocks. All told, the New England-focused utility, formed by a merger between Northeast Utilities and NSTAR, offers a combination of generous dividend, some capital-growth prospects, and manageable debt -- and it hasn't been loading up on debt in order to generate growth. Lee Samaha has no position in any stocks mentioned.

The Motley Fool recommends Dominion Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. A firm believer in behavioural finance and an Austrian approach to the business cycle.

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4 Utility Stocks All Retirees Should Own -- The Motley Fool

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How to Invest in Utility Stocks

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