Today, I’m looking at two dividend stocks to buy and hold for the long haul.
When you’re looking for stocks to keep for the next 10 years, the business would have to possess a robust track record of returning value to shareholders, have a resilient business model and offer a long-term growth story.
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With these three criteria, Severn Trent (LSE: SVT) comes to my mind. As a regulated water utility company with a monopoly over its customers, it generates stable earnings that grow steadily with inflation. This enables the firm to pay growing dividends to shareholders year after year, which makes its shares so attractive for investors looking for an inflation-beating income.
On the downside, investors need be wary of regulatory risk. Every five years, Ofwat, the water regulator, reviews and decides how much water companies need to invest in their infrastructure, and the level of customers’ bills needed to achieve this.
In a draft methodology paper published earlier this month, the next industry price review (PR19) looks set to be tougher than before. Ofwat is expecting to see significant improvement in affordability, customer service and innovation.
However, Severn Trent is also encouraged by the proposed changes to how good performing companies will be rewarded, as Ofwat is set to sharpen incentives for innovation by uncapping customer Outcome Delivery Incentive (ODI) rewards and increasing the role of cost sharing.
The firm has embraced the ODI regime, and is well placed to benefit from the changes as its comparative performance in the first two years of the current regulatory period has been encouraging. Its performance on water quality compliance and customer service is one of the highest in the industry, and as such, it expects to be well rewarded.
In today’s trading update, the company upgraded guidance on its business services unit, and said it now expects both revenue and profit before interest and tax in this segment to grow on a like-for-like basis. In addition, the board continues to expect the company to deliver full-year trading performance in line with expectations and its prior guidance.
With shares currently trading at 18.4 times forward earnings and a prospective yield of 3.9% this year, Severn Trent seems to me reasonably valued.
Looking elsewhere, I reckon that healthcare property-rental company Assura (LSE: AGR) is another great long-term income play. The REIT is the largest primary care property investor and developer in the UK, with 422 medical centres and a total annualised rent roll of £76.9m.
While the healthcare property sector is not immune to macroeconomic risks, the sector is somewhat shielded by a chronic shortage of suitable properties and the non-cyclical nature of demand for healthcare. What’s more, Assura benefits from long lease terms, with an average unexpired lease term of 13.1 years, and inflation-linked leases, which offer it significant protection against a potential downturn.
In Tuesday’s trading update, the company announced that it had achieved a weighted average annual rent increase of 2.07% from 36 reviews settled in the three months to 30 June 2017. Looking ahead, it is set to grow its portfolio with £146m worth of new rental assets coming from acquisitions and new developments.
Shares in Assura currently trade at a 25% premium to its NAV, with a trailing yield of 3.7%.