Utilities are the darlings of income investors for good reason: Their returns are regulated—and thus guaranteed—at levels that allow for a “fair” rate of return. But not any utility company will do. Investors should seek companies that have good relations with regulators, diverse energy sources, as well as growth potential. Such is the case for Dominion Resources (NYSE: D), the nation’s fourth-largest electric utility, with 2.3 million customers in Virginia and North Carolina, and retail service in another 15 states.

Dominion’s stock has steadily outperformed the S&P 500 the past 25 years, returning a very impressive 11.3 percent annually compared to the S&P 500’s 9.4 percent annual gain, with virtually all of Dominion’s returns coming from its dividend. Just in the past five years, Dominion’s dividend has grown 8 percent annually.

We think this consistent performance will continue because Dominion is planning to invest more in its regulated business, which currently brings in some 87 percent of revenue. In September, Dominion announced it would sell three unregulated or “merchant” power stations that produce roughly 15 percent of its total generation capacity.

Using the sale proceeds and internally generated cash, Dominion intends to invest $8 billion from now until 2016 to reduce debt and to build or acquire new power sources and transmission lines, as well as natural gas pipelines. We expect regulators will allow it to recoup its usual return on this investment, resulting in earnings growth of 5 percent to 6 percent annually over the next three years.

Dominion has enjoyed amicable relations with its regulators, especially in Virginia where it generates more than half its sales. For 2012, Virginia regulators have already set an authorized return on equity of 10.9 percent for the company, derived from its base rates going forward.

Virginia law actually allows Dominion to earn up to 11.4 percent on equity, before triggering any potential refunds or rate reductions. Despite this generous level, Dominion’s rates remain competitive and fair to its customers, at 10 percent below the national average and 19 percent lower than its Eastern Seaboard peers.

The company also boasts a reputation for reliable service. In 2011, despite two consecutive disasters—an earthquake and Hurricane Irene— Dominion still managed to quickly restore power to its customers. And this summer, it received outstanding performance reviews following the severe thunderstorms that struck multiple states, knocking out power to millions.

Unusually mild weather hindered Dominion’s revenue the first half of 2012, and profits fell 23.2 percent in the second quarter, to $258 million. Much of this earnings drop was due to $45 million in expenses incurred during the storms; however, this hefty repair bill will help Dominion keep on good terms with regulators and customers. Dominion’s mid-Atlantic competitor, Pepco Holdings (NYSE: POM), reacted slowly to the disaster and was blasted by state regulators.

Finally, we like Dominion’s presence in natural gas: Dominion owns 11,000 miles of natural-gas pipeline and has the nation’s largest gas-storage system, with capacity of 947 billion cubic feet. Natural gas is expected to be the fastest-growing fuel source in the coming decade. Dominion’s 2012 energy sourcing: 31 percent nuclear, 27 percent coal, 24 percent natural gas, and 18 percent oil and other sources.

Currently priced at $53, near its 52-week high, Dominion is a long-term buy for its stable dividend, and is a bargain should the price dip from current levels. An automatic investment program into these shares would also be a good approach.