Some investors dismiss utility stocks as dull but in the age of low interest rates the yields they offer are enough to get your blood racing. Income streams of up to 6% are certainly less boring than getting 1.5% on your savings. Here are four to consider.
Centrica
Investors in British Gas owner Centrica (LSE: CNA) probably crave a little dullness by now. Its share price has delivered plenty of action, but sadly, of the wrong type. The stock is down 42% in the last two years: this type of thing wasn’t supposed to happen to a utility.
Even the surprise Conservative victory in May, which put Ed Miliband’s proposed utility price freeze to the sword, did little to help its recovery. Management recently cut the interim dividend by 30% but it is still forecast to yield 5.4% in 2016. Centrica’s cost-cutting programme should protect profits, and with rate hike prospects fading again, it offers a tempting income. At 12 times earnings, investors can hope for some long-term growth as well.
Pennon Group
Water, sewage and waste specialists Pennon Group (LSE: PNN) offers a soggy yield compared to Centrica but 4.34% is still worth having. Management recently hiked the dividend by 5% when announcing its full-year earnings and the future looks progressive, with targeted annual dividend hikes of 4% above RPI to 2020.
Pennon’s share price has taken a recent hit, falling 12% over the past three months, yet it still trades at a relatively pricey 18.37 times earnings. Worryingly, EPS is expected to fall around 6-7% for the next two years, before rebounding 9% in 2017. By then, the yield is forecast to hit 5%. The only downside is that at today’s valuation, Pennon may be a little pricey for some.
Severn Trent
Severn Trent (LSE: SVT) has been behaving like a utility stock is supposed to behave. Share price growth has been steady over the last five years: it has grown more than 50% over that time. Like Pennon, it looks expensive at just under 20 times earnings, and yields a steady 4.05%.
My concern is that its premium valuation seems to have been pumped up by speculation and rumour. I never buy stocks on takeover talk, as such talk is cheap (but costly if it comes to nought). A forecast 15% drop in EPS in the year to next March is a concern, and analysts expect the yield to stick around today’s underwhelming levels. A stock to watch, but not one I would rush to buy right now.
SSE
SSE (LSE: SSE) offers the brightest yield of all these four utility stocks at an electric 6.19%, available at just under 12 times earnings. This has been a great income stock, with long-term progression of 10% a year since 1992, but as earnings and cash flow come under pressure, some investors have expressed concerns that the dividend might even be cut.
No sign of that yet, with management promising to raise it by at least RPI going forwards. With the share price slipping 12% in the last three months, now could be a handy time to lock into a yield that gives you almost 13 times base rate.
