I think dividend stocks are a good way to build up a stream of passive income for my future. But I like to choose such stocks with care. Because not all stocks offer me an opportunity to earn predictable dividends. And when I am building a second income stream, it helps to have visibility on my future earnings. This helps me plan both my spending and savings better.
There is one set of FTSE 100 stocks that is quite dependable, however. I am talking about the utility stocks like National Grid, SSE, Severn Trent, and United Utilities. Each one of them has consistently paid dividends for at least the last decade. And their dividend yields have not fluctuated much either.
But besides dividend predictability there are are three other reasons I like these stocks right now as well.
FTSE 100 stocks with elevated dividend yields
First, is their dividend yield levels. They may not have the highest dividend yields, but they are not the lowest either. Each of them has a higher yield than the FTSE 100 average of 3.4%. Severn Trent, which has the lowest yield among them is still at 3.8%. The highest is offered by National Grid at 5.4%.
Second, these dividend yields also ensure that I can earn positive real returns even in a high inflation environment, like right now. Inflation based on consumer prices has come in above 3% on a year-on-year basis for the second month running in September in the UK. While the full-year inflation figure is likely to be lower since it averages price rises across all 12 months, the current elevated numbers do underline the risk of price rise. All the four utilities under consideration here offer higher yields.
Utility stocks are safe bets in slowdowns
Third, in the event of a slowdown in the economy, I want my money in stocks whose value does not plunge to near-nothing. The demand for utilities’ services is relatively resilient even during poor economic times, which may just happen. While the UK economy is recovering, its pace is still quite slow. In August, it grew by just 0.4% month on month, which is disappointing since this was the first full month since the lockdowns lifted.
High inflation is another reason why growth can remain sluggish. FTSE 100 companies are facing cost pressures, which can show up in their financials and in slower growth at the macro level. Withdrawal of supportive policies like the stamp duty holiday and low interest rates can impact the property market and credit demand in general, which can also further slow down the recovery.
The drawbacks and my takeaway
With this uncertainty around, I am happy to invest in safe utility stocks that can give me continued dividends even at such times. Of course the flip side is that their capital growth is almost never as sharp as that of cyclical stocks, like metals or retailers, which have really rallied in the past year. But then again, as long as I make some capital gains over time with utilities, relatively high and dependable dividends go a long way for me.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended National Grid. 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.