When I buy income stocks, I base them on four criteria. These are a company’s financial health, its long-term prospects, its history as far as dividends go, and last, but not the least, its dividend yield.
This helps me eliminate a lot of FTSE 100 income stocks that otherwise may look good. Even after this, though, I am still left with a number of high-quality stocks. So for now, I am applying an additional criterion associated with the current context.
Filtering dividend stocks
It is this. If we consider that the pandemic continues for longer than is expected, which companies will be best placed to pay me dividends?
The answers very clearly are defensive stocks. These refer to stocks whose demand does not change dramatically with changing economic conditions. Among these, I find that utilities are the best bet.
Full-year results across FTSE 100 utilities tell me that their results are largely stable. This is in contrast to many others whose businesses were battered by the coronavirus, and may even take a long time to recover. Among FTSE 100 utility stocks, at least three I can consider buying now are as follows.
#1. National Grid
Electricity and gas provider National Grid’s latest results were a mixed bag, partly because of pandemic-related costs. However, it is still profitable and expects per share earnings to grow between 5% and 7% next year. This also bodes well for its dividends. I also like its recent forays into renewable energy, which indicate that it is pivoting towards the energy source of the future. Its current dividend yield is 5.3%.
#2. SSE
Energy company SSE turned in a decent set of results recently even though its profits were impacted by a drag from Covid-19. This is positive, but what I like most is its commitment to dividend continuity. It has a 5.2% dividend yield and it has linked dividends to inflation, which promises a healthy return for investors. It has also shown healthy share price growth over the past year, which makes it a growth stock as well.
#3. United Utilities
The share price of water and wastewater services provider United Utilities was barely impacted by the market crash last year, which is a good sign. Its financials have taken a hit this year, to be sure. This is not because of a drop in demand however, but because of a new pricing plan and higher investments. It has a dividend yield of 4.2% and, based on its past performance and its outlook, I reckon it can continue to generate a decent income stream overtime as well.
A point to note about FTSE 100 utilities
I would, however, like to add that while I think these stocks are reliable to obtain long-term income, all stock market investing is subject to risks. So it is possible that for reasons that I cannot guess today, they could withdraw dividends in the future. But I think the risk of that happening is lower than for many other FTSE 100 stocks.
