MENU

3 high-yield stocks with defensive appeal

Image: PayPoint. Fair use.

Considering the looming European elections and economic uncertainty on both sides of the Atlantic, now may be a good time to move into less volatile investments which provide stable incomes. With this in mind, here are three stocks to consider.

SSE

First up is Britain’s second biggest energy supplier SSE (LSE: SSE), which benefits from a well-diversified and defensive business model. The company gets more than half of its underlying earnings from its regulated gas distribution and electricity monopolies, with the remaining earnings coming from the more volatile supply and electricity generation businesses.

This means SSE has a great deal more certainty over future cash flows than many of its rivals, which allows it to sustain a relatively higher dividend payout ratio. Last year, the company raised its dividend per share by 1.1%, in line with RPI inflation, despite a slight dip in adjusted earnings which raised its dividend payout ratio to nearly 75%.

Moreover, the company has a strong track record of delivering growing dividends, with 14 consecutive years of annual dividend increases under its belt. Continuing this progressive dividend policy is one of management’s top priorities, with the company promising to maintain dividend increases of at least RPI inflation annually in the foreseeable future.

At today’s share price of 1,529p, SSE is reasonably valued with a forward P/E of 12.7 and a dividend yield of 5.8%

Paypoint

It’s not just utilities that make good defensive stocks. Defensive companies are those providing goods or services whose demand is not highly correlated with the larger economic cycle. And one company which seems to fit that description well is Paypoint (LSE: PAY).

The payment solutions company benefits from high barriers to entry and low variable costs, which allows it to earn steady service and transaction fees and maintain hefty operating margins of just over 40%. Additionally, the FTSE 250 firm has an attractive track record when it comes to delivering dividends, with payouts increasing every year since 2005.

The stock currently trades at 15.3 times its expected earnings this year, with a prospective dividend yield of 4.7%.

Halfords

Halfords (LSE: HFD) does not come across as your typical defensive stock, as the retail industry is generally considered to be a cyclical sector.

However, as car maintenance/repair makes up around 70% of Halford’s business, the company does actually have some intrinsically defensive qualities. After all, customers can’t avoid taking their cars for an annual MOT or avoid conducting necessary repairs. And just in case you don’t believe me, the stock’s low five-year beta of 0.34 confirms this — it’s also actually significantly lower than SSE’s beta of 0.48.

At current levels, Halfords is trading on a modest 11.2 times expected earnings this year, falling to just 11 times on its 2018 forecasts. On top of this, shareholders can look forward to a prospective dividend yield of 5.5%

Before you decide for yourself...

Building a successful investment portfolio isn't just about picking winners. The Motley Fool has a free special report called Your 10 Step Guide To Making A Million In The Market, which will show you the value of compounded investment returns and the importance of thinking for yourself

It's completely free and there's no further obligation. Get your copy now.

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