Trying to find a selection of the best buy-and-hold stocks for your portfolio isn’t an easy task. Indeed, finding the best companies with the most sustainable dividends and long term business models requires plenty of research. Many investors just don’t have the time to do the amount of research required.
However, investing in the utility sector is usually a pretty safe bet. The sector is relatively defensive and there will always be customers willing to pay for utilities. What’s more, these companies tend to return the majority of their profits to investors, which translates into healthy dividends for shareholders.
Centrica (LSE: CNA) and SSE (LSE: SSE) are just two of the defensive utility plays that would fit well into any investors’ portfolio.
Unbeatable
When it comes to dividends, SSE and Centrica are unbeatable. For example, SSE’s shares currently support a dividend yield of 6.4% and Centrica’s shares currently yield 5.7%. Both payouts are covered one-and-a-half times by earnings per share.
Still, SSE and Centrica aren’t going to make you a millionaire overnight. While the two companies do support some of the best yields around, their growth leaves a lot to be desired. City forecasts suggest that Centrica’s earnings per share are set to fall 8% this year, before stabilising during 2016. SSE’s earnings are projected to fall by 8% for the year to 31 March 2016, before ticking higher by 2% for the 12 months ending 31 March 2017.
Nonetheless, while growth remains elusive for Centrica and SSE, due to the nature of their businesses, the two companies have a certain degree of clarity over revenue streams. As a result, it’s unlikely management will suddenly take an axe to the dividend, giving investors a dependable income stream to rely on and build the rest of their portfolio around.
That being said, Centrica did announce a dividend cut earlier this year, but many analysts were expecting the company to make such a move after its misguided expansion into the oil & gas market. Now Centrica’s dividend payout looks safe for the time being. Payout cover has increased by 30% since the beginning of the year and the company is curtailing its exposure to the volatile oil & gas market.
Growth pick
If you’re not interested in SSE and Centrica’s slow-and-steady business models, Utilitywise (LSE: UTW) might be a better pick. City analysts expect Utilitywise to report EPS growth of 37% for full-year 2016 and based on this prediction, the company is trading at a forward P/E of 7.7.
This might seem like a low valuation for a business that’s expected to chalk up EPS growth of 37% next year. But Utilitywise’s low multiple reflects the City’s concern about the way the company recognises revenue and the lack of cash the group is generating from operations.
However, today the group announced that it’s working hard to change the way it does business by renegotiating contracts with existing suppliers. These negotiations are designed to help the group reach its fundamental goal of improving cash conversion to offset concerns about the way the company recognises revenue. In theory, this change of strategy should translate into a higher valuation for the company’s shares.
