FTSE 100 energy company SSE (SSE) operates regulated electricity networks in the UK. And the company has been doing a good job moving operations over to renewable energy sources such as wind generators.
Meanwhile, shareholder payments look set to grow by increments in the years ahead after the directors rebased the dividend lower in the trading year to March 2020.
With the share price near 1,556p, the forward-looking yield is around 5.5% for the year to March 2023. I think that’s a generous and potentially sustainable yield from a business that fits well in today’s energy markets. I’d buy the shares with the aim of holding for at least a decade.
Of course, there are no guarantees of a positive investment return. And one area I’d keep an eye on is the firm’s level of borrowings, which are quite high. Indeed, the energy business takes lots of cash to develop and maintain infrastructure. If SSE’s cash flow falters, it’s possible shareholder returns could come under pressure. Nevertheless, I’d embrace the risks and include the stock in a long-term diversified dividend portfolio.
A defensive, cash-generating sector
In the FTSE 250 index, I reckon one of the best income investments can be found in food and beverage ingredients producer Tate & Lyle (LSE: TATE). I like the strong record of incremental rises in the dividend and the way a consistent stream of cash flowing into the business backs those payments.
It helps a lot that the firm operates in a stable and defensive sector, which I see as ideal for a dividend-led investment strategy.
With the share price near 763p, the forward-looking yield is near 4.3% for the trading year to March 2023. And in last week’s full-year results report, the company reported a “robust” performance. And the directors said the business is emerging stronger from the pandemic with decent long-term growth potential.
One concern I have is that City analysts forecast the pace of growth in earnings to be pedestrian. And it’s possible the valuation could contract, especially if earnings slip in the years ahead. Nevertheless, I’d take on the risks and buy some of the shares to hold for the long term.
A FTSE company in a unique position
I’d find a place in my income portfolio for FTSE 100 energy company National Grid (LSE: NG). The firm has a unique position at the heart of the UK’s energy transmission networks. And it also has an energy business in the USA. Both divisions generate steady incoming cash flow, which is good for servicing shareholder dividends.
With the share price at 952p, the forward-looking dividend yield is around 5.4% for the trading year to March 2023. And City analysts see modest increases in the dividend in the coming years. However, National Grid is a heavily regulated business and capital reinvestment requirements are high for sustaining and improving the energy networks.
The firm has a high debt load and the directors will always need to balance servicing debt interest and shareholder dividend returns. It’s possible that future changes in regulatory requirements could make that task more difficult and I could lose money on the shares.
However, I’d take the risk and aim to hold the stock for a long-term investment.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.