(FORTUNE Magazine) – Here's a little-known fact about the frothy stock market of the 1980s: While the Standard & Poor's 500 stocks sprinted to an average annual return of 17.4%, their plodding brethren, utilities, did even better, returning 21.4% annually. That the tortoise handily beat the hare in that heady decade illustrates an investing lesson for the 1990s -- the importance of dividend growth and reinvestment to total return. Price appreciation accounted for roughly the same portion of the rise in both kinds of stocks -- 12.6 percentage points of the S&P 500's annual return and 12 points of the utility stocks' return. The punch in performance came from dividends -- 9.4 percentage points for utilities, nearly double the 4.8 points for the S&P 500. Since Wall Street expects that total return for stocks in the 1990s will be in the range of a sedate 10% annually, dividend growth is going to play an even bigger role. That's why investors everywhere are eyeing that turtle. Money has been pouring into utility stocks and mutual funds, and stock prices rose 6.2% in the second quarter of this year. Christopher Wiles, who manages two utility funds with combined assets of $770 million for Federated Investors, offers compelling historical evidence for investing in utilities now despite their rise in price. Over the past 65 years, whenever yields on the S&P 500 stocks fell below 3.06% -- they are now at 3% -- those shares returned 5.3% a year on average in the subsequent ten years. By comparison, whenever the yields on utility stocks have been between 5.5% and 6% -- they are currently 5.6% -- utilities have returned an average 12.5% a year in the following ten years. Among the utilities, electric companies are the most regulated, and therefore their stock prices tend to be the least volatile. Still, investors should discriminate within that group and buy those utilities with the potential to increase their dividends. Says Jeffrey Ubben, who manages three utility portfolios for Fidelity, including the Utilities Income Fund: ''You don't want companies with high yields and no dividend growth, because then all you're really getting is a bond surrogate with more risk.'' Ubben also warns against high price-to-book-value ratios, since regulators keep a close eye on them. Says he: ''If the stock rises much above 1.5 times the book value, regulators might reduce the rates the company can charge its customers.'' Among the three stocks Ubben recommends is a utility in New Orleans, Entergy, with 1991 revenues of $4.1 billion, which recently agreed to acquire the neighboring Gulf States Utilities in Texas. The merger's savings in reduced fuel and operating costs should total $1.1 billion over the next eight years. ''Entergy's management knows how to create shareholder value, and buying back stock is a priority for them,'' says Ubben. He also expects the company to raise the dividend 14% to $1.60 later this year and grow at a 10% annual rate over the next five years. Another utility, DQE, with revenues of $1.2 billion, serves Pittsburgh and surrounding counties. It plans to build a transmission line to New Jersey that could help alleviate the power shortage in the Northeast. The management of Illinois Power ($1.5 billion in revenues) ''is very aggressive about raising dividends and looking after shareholders' interests,'' says Ubben. The stock yields only 3.3%, but he expects the dividend to rise from 80 cents to $1.20 later this year and grow 13% annually through 1996. Chris Wiles of Federated Investors favors Utilicorp United, a $1.1 billion company in Kansas City, Missouri, which has diversified its regulatory risks by expanding to eight states. Utilicorp recently announced an $11.6 million write-off because of an alleged misappropriation of funds by some employees. Says Wiles: ''The company was forthright with the announcement. And I believe it's a one-time hit.'' He expects Utilicorp to increase its $1.60 dividend 3% to 5% a year for the next five years. Though he's a utility bear, Morgan Stanley analyst Sanford M. Cohen admits to a fondness for Philadelphia Electric, which yields 4.9% and is boosting its dividend at a 7% annual rate. The company has $4 billion in revenues, and a new chairman and senior executives are cutting costs and interest expense in an attempt to become one of the best-managed utilities in the country. Northeast Utilities just spent $40 million on a new budgeting system that will allow it to keep close track of costs. Cohen estimates that the company will generate $1 billion in free cash flow between 1993 and 1996, and he expects the dividend, now yielding 6.8%, to grow at a 2.5% rate over the next five years. For investors who are strictly oriented toward yield, Jack Levande, who manages the $1.6 billion Shearson Lehman Brothers Utilities Portfolio, recommends Texas Utilities, with $4.9 billion in revenues. Its yield: 7.3%. The company took a write-off last year when regulators ruled that it could not pass on all its construction costs to customers. It faces another rate battle this winter, but Levande thinks the market has already discounted this regulatory uncertainty. Says he: ''For the yield you're getting vs. the risk you're taking, the stock is a good value.''

CHART: NOT AVAILABLE CREDIT: SOURCES: COMPANY REPORTS, I/B/E/S CAPTION: UTILITY Markets served