I believe that defensive companies make the best dividend stocks. Businesses that have a secure income stream from property, or stable, regulated assets… firms just like Unite Group (LSE: UTG).
It describes itself as “the UK’s leading manager and developer of student accommodation.” The group has two main businesses, the Unite UK Student Accommodation Fund (USAF) and the London Student Accommodation Joint Venture (LSAV). These control 25,218 beds and 8,477 beds respectively across 84 properties.
These assets provide the business with a steady, predictable income stream. Based on letting figures for the 2018/19 academic year (so far 89% of bed spaces are let for this year) USAF’s portfolio has a blended yield of 5.4% and LSAV’s yield is 4.6%.
That being said, unfortunately, if it’s growth that you’re after, Unite will disappoint. According to a trading update published today, at 30 June, USAF’s property portfolio was independently valued at £2.3bn representing a like-for-like increase in value of 1.2% during the quarter. LSAV registered like-for-like portfolio growth of 2.5%.
Still, it’s my view that using quarterly valuations for property portfolios isn’t relevant because property should be viewed as a long-term investment. Indeed, generating capital growth isn’t Unite’s primary aim. The firm’s focus is to “deliver sustainable growth in our recurring earnings and cash flows,” giving investors a steady, reliable income stream from student property.
And it’s this focus on cash flow that leads me to conclude that Unite is a great income stock for any retirement portfolio.
Analysts are expecting the firm to pay a dividend of 28p per share this year, giving a yield of 3.4%. Further growth of 15% is projected for next year giving a prospective yield of 3.9%.
Preparing for the worst
Since then, the stock has risen by nearly a third and some of the margin of safety for investors has disappeared. However, this defensive income play still supports a dividend yield of 5.2% and I continue to believe that the risks facing water companies like Pennon are overstated.
Indeed, even though the company is facing tighter controls from regulator Ofwat, Pennon is diversified through its waste management business Viridor.
Viridor’s fleet of energy recovery facilities transforms household waste into electricity and heat. Revenue from this business, at £786m, was higher than Pennon’s water revenue of £571m for 2017/2018, but due to higher levels of capital investment, profit before tax was 61% lower. Nonetheless, Viridor is growing earnings three times faster, and management believes the expansion of its energy recovery facility portfolio will “support Pennon’s earnings growth to 2020 and beyond.” Four new facilities are expected to become commercially operational within the next few years.
Growth at Viridor, analysts believe, will help support dividend growth of 7% per annum, and earnings expansion of 10% overall for the next two years, leaving shares in Pennon supporting a yield of 5.5%.
For long-term income seekers, I believe shares in Pennon look to be a great investment.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Pennon Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.