Will these power firms generate superior returns?

Bilaal Mohamed considers the merits of investing in two utility giants.

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The UK’s electricity and gas distributor National Grid (LSE: NG) can do little wrong at the moment. Revenues are rising steadily year-on-year and earnings have been moving in an upward direction for at least a decade-and-a-half. The upshot of all this success of course has been the rising share price, with the utility giant now trading at all-time highs and at twice the levels of just six years ago.

But don’t forget, we’re talking about a low-risk defensive utility giant that isn’t expected to grow at any significant pace. Instead it should be providing its shareholders with steady and stable dividend income for years on end. Surely the rising share price has meant rapidly shrinking yields?

Not a chance. Our friendly giant has been teasing new investors with improved dividend payouts since time began, maybe even a little earlier. The result is that investors have been rewarded with a progressive dividend that has continued to beat inflation, while also beating the FTSE 100 average yield. Could things get any better for National Grid’s shareholders?

Special dividend?

Well they might. Last November the company announced that it would be selling a majority stake in its gas distribution business, with proceeds being returned to shareholders as well as being used to reduce debt. So a special dividend could be on the cards maybe as early as next year, yummy.

As far as the normal dividends are concerned, the suits in the City are predicting a 1.04p rise in the payout for the year to the end of March 2017, with a further 1.2p per share increase expected for FY2018, leaving the shares trading on prospective yields of 4.2% and 4.3% for the next two years. For me National Grid remains one of the lowest risk companies in the UK and offers rising inflation-proof income for investors in the market for a low-risk defensive stock to buy and forget.

Chunky payouts

Gas and electricity supplier SSE (LSE: SSE) is another utility giant that risk-averse investors depend on for a steady stream of inflation-beating returns. But unlike National Grid it doesn’t have a virtual monopoly on its activities. Indeed, earlier this year the company announced that it had lost 50,000 gas and electricity customers within the space of just three months. That might sound like a big number but is dwarfed when compared to the 399,000 customers that moved away from rival British Gas in the first half of its financial year.

The truth of the matter is that the energy market is changing, with more and more customers moving away from the Big Six suppliers and towards smaller players. Nevertheless, SSE still has 8.16m customers from which to generate oodles of cash. In fact, the Perth-based firm is expected to generate close to £30bn in revenues this year with pre-tax profits exceeding £1.5bn.

That sounds like great news for SSE, but it’s also great news for shareholders who are in line to receive yet another improved dividend. It’s forecast at 90.21p per share for the current year, with another hike to 92.15p expected for next year, giving a prospective yield of 6%. SSE remains an attractive defensive play for investors looking for chunky low-risk dividend income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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