Yielding 5%, is this defensive stock perfect to boost passive income?

Sumayya Mansoor takes a closer look at whether this utility stock could be a good addition to her holdings for passive income.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Asian man drinking coffee at home and looking at his phone

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

One stock I want to take a closer look at, with a view to boosting my passive income, is United Utilities (LSE: UU.). Let’s dig deeper into the investment case.

Water and waste water services

United Utilities is a holding company for United Utilities Water, which is the country’s largest regulated water and wastewater utility business. It serves the northwest of England, which includes Manchester and Liverpool.

Let’s start by looking at United’s share price. As I write, the shares are trading for 935p. At this time last year, they were trading for 1,066p, which is a 12% drop over a 12-month period.

To buy or not to buy?

I believe United Utilities has defensive capabilities. This is because water is an essential requirement for day-to-day life for everyone. This includes homes and businesses. No matter the economic outlook, everyone needs water and must pay their water bills. This should lead to consistent revenues and shareholder returns, which would boost my passive income stream.

Looking back at the past four years, United Utilities has recorded very consistent performance in terms of revenue and profit. I do understand that past performance is not a guarantee of the future.

With United able to secure consistent revenues and performance levels, its returns are also consistent. At present, a dividend yield of 5% is enticing. Furthermore, over the past four years, United has grown its annual payout by 2.5%, which is pleasing to see. However, I’m aware that dividends are never guaranteed.

Moving on to the bear case, water companies like United have come under lots of pressure in recent times. This can lead to negative investor sentiment. One of the reasons for this is the increased levels of raw sewage being pumped into rivers and seas, especially when there is heavy rainfall. Another issue is that of privatisation. The water industry has been accused of rewarding shareholders through privatisation ahead of serving its customers. With this, comes the ever-present threat of tightened regulation around investor returns and capital expenditure on infrastructure, which could take a bite out of profits, shareholder returns, and any passive income I’d hope to make.

Finally, United shares do look expensive to me right now on a price-to-earnings ratio of 33. The shares could tumble based on the factors mentioned earlier around pressure from the government as well as consumer groups.

Better passive income stocks out there

To conclude, I’ve decided not to buy United Utilities shares for my holdings. The negative sentiment and threat of changing regulation that could impact returns around the water industry are putting me off. I will keep a close eye on developments when it comes to United shares and the water industry as a whole.

I believe there are better passive income stocks for me to buy for my holdings operating in sectors with less threats and issues, but just as stable levels of growth and returns. I’ve been looking at telecoms and banking stocks recently that fit the bill for me such as Vodafone and Legal & General, to provide two examples.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Sumayya Mansoor has no position in any of the shares 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.

More on Investing Articles

Bearded man writing on notepad in front of computer
Investing Articles

I’m getting nervous about the Lloyds share price

The Lloyds share price has soared by more than 50% over the past 12 month, easily beating the wider FTSE…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Meta stock is up 17 days in a row! Time to buy this record-setter?

Our writer wonders whether now is the time for him to add Meta stock to his ISA portfolio after its…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

4 good reasons why I’m avoiding cheap Lloyds shares like the plague!

Lloyds shares look dirt cheap based on earnings, dividends, AND asset values. But is the FTSE 100 bank a risk…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

31% revenue growth! This top growth stock just keeps powering on

Shopify (NYSE:SHOP) smashed it in the fourth quarter, wrapping up an outstanding 2024. But is this growth stock worth considering…

Read more »

Investing Articles

Down 23% in a year, is Frasers Group a FTSE 250 bargain?

Christopher Ruane explains why he is taking the Buffett approach by sticking to what he comfortably understands. That does not…

Read more »

The words "what's your plan for retirement" written on chalkboard on pavement somewhere in London
Investing Articles

How much would someone need to invest in the stock market to retire and live off passive income?

Christopher Ruane explains some approaches and potential pitfalls of putting money in the stock market to try and retire early…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Growth Shares

This little-known technology company is now the 6th-largest business in the FTSE 100

Over the last few years, this under-the-radar technology business has quietly become one of the largest companies in the FTSE…

Read more »

Investing Articles

Barratt Redrow shares spike 6% as profits forecasts hiked! Time to consider buying in?

Barratt shares are leading the FTSE 100 higher in midweek business. Is now the time to consider the housebuilder as…

Read more »