Uncertainties beleaguer the once rock-steady utility stocks

Whether the economy is experiencing boom, bust, or steady growth, it's virtually certain Americans will always need electricity, home heating, and telephone service.

That modest assumption traditionally led ''widows and orphans'' - and conservative investors in general - to hold the stocks of utility companies, from which they could earn reasonable dividends and have little in the way of portfolio management to worry about.

But dividends, while steady and reassuring, are taxable as income. What you lose in taxes is seldom compensated by an increase in the value of the utility company's stock - especially since utilities today are beset by problems that don't help the value of the stock.

The unknowns involved in the American Telephone & Telegraph divestiture, questions about nuclear power, a surfeit of electricity, unstable oil and gas prices, inflation, rising interest rates - these make utility stocks much more risky.

''Today,'' observes Gerald L. Stevens, president of the Vanguard Group Inc. of Valley Forge, Pa., ''the traditional investor in utilities is churning. They appeal either to a savvy investor who wants a pure play or a corporation.''

Neither sound like ''widows and orphans.''

Still, many utilities continue to realize good yields, and since utilities are troubled, some investment advisers see them as a good value for the money right now.

Moreover, there is a way to decrease the tax exposure you get when you receive those dividends: You can filter your utility holdings through a mutual fund. Utility dividends that are earned by a mutual fund are taxed at the 85 percent rate, and an investor can treat them as capital gains when liquidated. Also, these mutual funds can use operating expenses to write off the balance of the income earned from utility holdings.

This makes utility mutual funds attractive investment vehicles, assuming the utility industry does well enough in the next few years so yields remain high. For that, much depends on those huge variables - interest rates, inflation, the heat of the summer, the cold of the winter, the fickleness of the American public.

The fortunes of Fidelity Select Utilities, managed by Warren A. Casey, show that, while strong overall fund performance is possible, those variables are causing unprecedented volatility. In the third quarter of 1983, Fidelity Select, offered by the Fidelity mutual fund family of Boston, led the nation's mutual funds in performance. Mr. Casey attributes this to the exceptionally hot summer. Americans used much more electricity for air conditioning than normal, and utilities did well as a result.

But then a string of problems with nuclear plants and state regulatory commissions caused utility stock performance to tumble. Even so, for the year Fidelity Select finished with a 20 percent gain in asset value. This fund is invested mostly in natural gas. As the chilly winter progresses, this should give it fairly good performance. Despite problems in the nuclear area, Mr. Casey says, ''the longer term for utilities looks good. The yields are good.''

An example of the benefits of a utility fund is provided by Edwin W. Bragdon, portfolio manager of the Eaton Vance Tax-Managed Trust of Boston: An individual with high yield stock in, say, five utilities might be taxed in the 30-50 percent bracket on dividend income. If he sells or exchanges his utilities for shares in a tax-managed mutual fund he receives no dividend distribution. All goes into the fund, and after a year it is treated as a capital gain, thus decreasing his tax rate to 20 percent.

''What's more,'' Mr. Bragdon adds, ''if one of those five utilities was a nuclear disaster (not literally, of course) then 20 percent of his portfolio would be in trouble. But with 65 stocks in a mutual fund there is good diversification.''

For individual investors, Vanguard's QDP1 fund might offer a good long-term investment. But Mr. Stevens of the Vanguard Group notes that utility mutual funds are much more attractive to corporations today than individuals. An individual buying into a fund that is heavy on utilities usually must ''feel he can own a utility, gold, or technology fund because he understands the industry, wants a pure exposure, and can 'time' (the market) between sectors.''

Utility funds such as QDP1 are angled most toward corporate treasurers. They can devote more time and resources to analyzing the market than the individual investor. Moreover, because corporations can use the 85 percent dividend-received deduction in addition to the mutual fund's using the 85 percent dividend-received deduction (received from domestic corporations: utility companies) the ''total return'' after taxes to a corporation is very attractive.

Messrs. Stevens, Bragdon, and Casey agree that, as long as inflation remains moderate and interest rates do not accelerate, utilities will be better and better investments.

''I'm very optimistic,'' says Mr. Bragdon, ''the (electric) industry's capital building phase is peaking. In the next few years cash flow should be increasing as public financing needs decline. There will be excess plant capacity for a number of years, and as they sell more electricity there should be more earnings increases.''

Most managers of utility funds have decreased their holding of utilities that are having trouble with their nuclear power programs. But that cannot be done wholesale. Selectivity is the key. Says Mr. Casey: ''Of the 80 electric utilities that we follow, only 26 don't have nuclear. Even Texas Utilities, which has always been strong, has had nuclear problems. The chasm between nuclear and nonnuclear utilities is widening.''

Fidelity Select consciously avoids many of the East Coast and Midwest utilities that rely heavily on nuclear, Casey says. But his largest single holding is Southern California Edison, which has one nuclear plant; his sixth largest holding is Commonwealth Edison of Chicago, which has five such plants. Neither of these companies have had major problems with nuclear construction or with regulation.

The Eaton Vance trust was able to avoid the problems that utilities with nuclear plants experienced during the fall by selective investment. Says Mr. Bragdon: ''People who have not understood nuclear have been selling indiscriminately, and there are many well-managed projects. Nuclear has had the fewest fatalities of any energy source, and it is the one most people are worried about.''

QDP1 has 25 percent of its holdings in electric utilities and another 25 percent in suppliers such as natural gas and pipeline companies, says Vanguard's Mr. Stevens. But fund management is flexible and seeks ''companies with high, high current income and good capital gains potential.''

That should please even a conservative investor.