By Roger Conrad on October 1, 2011

All 11 fixed-income recommendations in the Utility Forecaster Income Portfolio Conservative Holdings have gained ground this year. Thats a clear result of investors willingness to pay up for safety.

Portfolio stocks, on the other hand, comprise a mixed bag, ranging from generally solid performance of most Growth Portfolio Core Holdings and Income Portfolio Aggressive Holdings to weaker Growth Portfolio Aggressive Holdings. That, too, mirrors the markets preference for de-risking.

If you want any sort of income today, youre going to have to own dividend-paying stocks. In fact, with corporate borrowing rates at their lowest levels in generations, the only bonds with decent yields are on the higher risk end of the spectrum, such as Level 3 Communications 8.75 Percent Note of 02/15/17 (CUSIP: 527298AL7) highlighted in Utility Beat .

The downside to stocks in this environment is, of course, that youve got to live with a lot of volatility. That wont cost you more than a little heartburn, provided the companies you own are still running well. But when a company does stumble, it can go down in a hurry, with little hope of timely recovery.

That appears to be the case with American Superconductor (NSDQ: AMSC). Last month I cut the stock to hold for speculators only. This month Im exiting for a sizeable loss.

The company is now suing its erstwhile largest customer, Chinas Sinovel Wind Group Company Ltd, for technology theft in Chinese courts. Management is confident of a turnaround. But the premise under which I recommended the stock no longer exists, so Im out. Sell American Superconductor.

Fortunately, the businesses behind the other 40 stocks in the Portfolio are still meeting management guidance for growth and dividend coverage. As long as thats the case theyll recover whatever stock market losses they suffer in the coming weeks.

Some have come down hard in recent weeks. Worst hit have been my energy producers, which investors seem to be unloading on expectations of sharply lower oil prices.

Energen Corp (NYSE: EGN). for example, has dropped from a mid-summer trading range in the mid-60s to low-40s. Chevron (NYSE: CVX) is back around $90 after surging nearly to $110. ARC Resources Ltd (TSX: ARX, OTC: AETUF) broke USD20 last month down from the mid-20s, and MDU Resources (NYSE: MDU) has slipped back to the high teens.

Each of these companies profit is affected by energy prices. All of them, however, also have exceptionally conservative finances, rising production profiles and aggressive hedging. MDU and Energen operate regulated utilities that both shield earnings from ups and downs in commodity prices and completely fund dividends.

ARC did trim its distribution in 2008-09, as oil fell from over $150 to less than $30 a barrel. But second-quarter 2011 cash flow covered its payout by a 2.5-to-1 margin at a realized selling price for gas (64 percent output) of just USD4 per thousand cubic feet. That implies a great deal of cushion for the current dividend of about 6 percent, even as the company appears on track to boost daily output another 10 percent by the end of the year.

Finally, all of these companies had the cash in 2008 to keep on investing and growing, and theyre even stronger now. In the unlikely event of a reprise, theyll live to fight another day. And in the far more probable case that markets stabilize long before such a calamity becomes reality, todays levels will prove great entry points. Buy Energen (up to 55), Chevron (100), ARC Resources (USD25) and MDU Resources (24).

My worst performer this year, Frontier Communications (NYSE: FTR). is a favorite target of short sellers, with bets against totaling more than six times daily volume. The bear view is the company wont be able to hold its quarterly dividend of 18.75 cents per share, given the 9 percent rate of access line losses in systems purchased July 2010 from Verizon Communications (NYSE: VZ) .

The bull bet is Frontier will meet managements target of $600 million in cost savings from the deal and will cut access-line losses at the new lines to the 6 percent rate at its other systems. Last month management generally affirmed that its meeting these targets, though it reduced the midpoint of free cash flow guidance by about $50 million to $1.125 billion, largely on hurricane and system conversion costs.

CEO Mary Agnes Wilderotter affirmed both the dividend as safe and secure and the expectation of better business revenue performance into 2012. And four officers and directors have made open market purchases the past two months, versus no sellers.

It boils down to this. If the bears are right, this stock is probably headed under $5. If the bulls are right, theres the potential for the mother of all short squeezes.

Considering managements track record of generally accurate guidance, I like the bull case, with one caveat: Only buy Frontier Communications stock if you dont already own it. Otherwise, just let it ride. Thats the best way to stay unemotional enough to sell if circumstances dictate.