(MONEY Magazine) – If you're expecting electric utilities to meander through 1994 as the reliable old dividend machines they've always been, you're in for a shock. Like bonds, utility shares will take a pratfall if interest rates climb. The 0.4-percentage-point rise in long-term rates since September has already chopped a painful 7.5% off the Oppenheimer Electrical Utility index. In addition, a two-year-old federal law that weakens electric companies' status as local monopolies will force many utilities to do something they've never done before -- compete. "Utilities that can't deliver power cheaply risk losing big industrial and municipal customers, who can either generate electricity themselves or go to more efficient utilities," warns Craig Lucas, an analyst at the New York City brokerage Oppenheimer & Co. The bond rating agencies Moody's and Standard & Poor's take the risk so seriously that both will consider downgrading as many as half of all electric companies in the next five years. Are utilities worth owning anyway? You'd better believe it. For starters, the price decline has elevated the average utility's yield to 6.1%. That's a 2.9-percentage-point margin over Treasury bills, nearly two points higher than the average over the past decade. And of course, utilities still have a unique advantage over fixed-income investments: Their dividends can grow. That's crucial in helping you defend the purchasing power of your income against inflation. For example, with consumer prices expected to rise a little over 3% a year, the $47.50-a-year payout on a five-year Treasury note will lose 16% of its value by the time the security matures. By contrast, the typical utility is expected to raise its dividend 2% to 2.5% annually over the next five years, which means that its income payout would erode by only 3% to 5%. (And most of the stocks recommended in the table below figure to increase their dividends by at least 3%, which would halt the erosion of your purchasing power entirely.) Moreover, if share prices keep pace with projected annual earnings growth of 2% to 3%, the average utility's total return -- dividends plus price increases -- will average 7.3% to 8.2% yearly through 1998. While utilities may fall short of that pace next year (our forecast for 1994 returns is 6% or so), the nine power suppliers below are equipped to handle the worst that 1994 is likely to offer. We chose them with the help of G.R. Pugh & Co., an industry research firm in Cranford, N.J. Among their attributes: -- Competitive advantage. We wanted only efficient energy providers that are more likely to take business from regional rivals than to lose it. All of our picks generate power more cheaply than the average utility in their regions. -- Reasonable yields. We ruled out utilities yielding more than a point above the current 6.1% average, because high dividends typically indicate financial problems. -- Low payout ratios. This figure -- the ratio of dividends to available earnings -- signals whether a utility is straining to maintain its dividend. Our picks' ratios are below the industry average of 85%. -- Good relations with regulators. Since state and local commissions set caps on utilities' charges and profit margins, staying on the regulators' good side is essential. "I can't think of a case where a regulator's action didn't play some role in a utility's dividend cut," says Roger Conrad, editor of Utility Forecaster in Alexandria, Va. Merrill Lynch analysts publish quarterly ratings of each utility's regulatory climate, based on their evaluations of past rate cases. Only companies rated average or better made our cut.

CHART: NOT AVAILABLE CREDIT: Sources: Merrill Lynch, Moody's Investors Service, Oppenheimer & Co., G.R. Pugh & Co., Value Line Investment Survey CAPTION: These top electrics can light up your cash flow All nine utilities boast dividend yields above 5%. And each of them gives every sign of being able to boost its dividends annually for at least the next five years.