(FORTUNE Magazine) – As manager of the $600-million Eaton Vance Total Return Trust, Edwin Bragdon, 64, has consistently beaten the market by investing almost entirely in utility stocks. Shares in the Total Return Trust* have risen 217% since the mutual fund began in December 1981. Meanwhile, the S&P 500 had a total return, including reinvested dividends, of 138%. Bragdon now has 95% of the fund's assets in utility stocks. He explained why in a recent interview with FORTUNE's Andrew Serwer. Excerpts: What's so great about utilities? First, the high yields. The better-quality electric utilities, the faster- growing ones, pay dividends of 5% to 6% and have dividend growth rates from 6% to 9%. If the stock price simply rises in step with the dividend, you have an 11% to 15% total return. Second, utility stocks are cheap. The average price- earnings ratio has been about half that of industrial stocks. The best utilities also give you stability, a consistent earnings record, and a dependable outlook instead of the uncertainties clouding the future of most of the industrials. If the picture is so bright, why haven't others gone after utilities and pushed their prices and P/Es higher? ^ Remember, utilities were really in the doghouse back in 1979 and 1980 because of very high interest rates, expensive nuclear construction programs, and the high cost of raising capital. For the most part those problems have disappeared. But it is taking investors a long time to get over their dislike of utilities. The market seems to have forgotten that electrics went up with few interruptions from 1946 to 1965. I'm not saying that will happen again, but I'd say the upward trend of the Eighties has further to go. Utilities are not created equal. How do you pick the right ones? We look for several key elements. Is the yield in the high 5% to 6% range? Is the dividend safe; can it be maintained? Will there be dividend growth? We answer these questions by reviewing the company's financing needs. We take a very close look at the balance sheet and the company's record of meeting budgets or running way over budget with construction projects. Another important piece of the puzzle is the state regulatory commission. Has it been handing down favorable rulings? Which have the strongest balance sheets? New York's Consolidated Edison is a financial powerhouse. It has little long-term debt and absolutely no short-term debt. Its dividend growth rate has been exceptional and should remain around 9% over the near term. It has bought in its stock and is generating more cash than it needs for expenses and debt maintenance. The total return could be near 14% -- 9% from price growth and 5% from the dividend, which should be around $2.68 a share, up from $2.40 last year. Earnings may be down this year until Con Ed gets rate relief, but I think the company is solid. Another utility with very strong financials is Potomac Electric Power. Pepco is in the Washington, D.C., area, where the housing market continues to expand. It has been refinancing old high-cost debt, and its capital expenditure plans are modest. This is another of those companies that's generating a lot of excess cash and can keep on raising its dividend. Which utilities are particularly successful at controlling construction costs? Southern California Edison is a good example. Even its nuclear programs have fared well. The company is running into some resistance in terms of recouping its costs of building the San Onofre nuclear power plant. But it is entitled to recapture the costs unless it was grossly negligent in supervising construction. I don't think it was negligent, and I doubt that the state commission is going to be tough on it. I also like Northern States Power and Duke Power. Northern States has an excellent record of controlling the costs of its nuclear plants. It also has a nice dividend growth rate. This year the dividend should be about $1.90 a share, up 8%. Duke is the lowest-cost builder of nuclear plants in the country. It just finished its Catawba No. 2 nuclear plant nine months ahead of schedule and $300 million below the $3.9-billion budget. Duke's dividend should be $2.68 a share this year, up from $2.54 in 1985. Do you like any utilities that are primarily nuclear? We have done well with Baltimore Gas & Electric. About 50% of its output is nuclear. This is another company that has built well. The company just seems to know what it is doing, maybe because its president is a nuclear engineer. Are there any utilities you don't like? Ones that have stopped paying dividends. Most of these, of course, are companies with nuclear projects that are in trouble. The group includes Consumers Power, Lilco, and Middle South Utilities. I also stay away from utilities that might have to cut their dividend, usually because of nuclear projects. Gulf States is at risk because it has such large cost overruns that the state commission may not let it add the costs to its rate base. The third group I dislike is utilities that have poor local economies, like Northern Indiana Public Service. Do you plan to move into any other stock groups? Not for now. This won't go on forever, but as long as the market prices utilities so much lower than other stocks relative to underlying value, and as long as the economy stays sluggish and interest rates look as if they are staying down, I think the trends are in our favor. Nothing is certain, but I think the probability of a decent return is greatest from utility stocks. FOOTNOTE: *Called the Eaton Vance Tax-Managed Trust until August