With interest rates being at historic lows for a handful of years now, finding a source of income has proven to be tough — especially for retired Fools.
Indeed, Bank account savings rates can offer little more than 3% unless the money is tied up for 3+ years, while the constant threat of higher inflation resulting from the Bank of England’s quantitative easing ‘experiment’ looms on the horizon.
So, utility shares have proven to be fairly popular in recent years as investors have sought to overcome the twin problems of inflation and low interest rates.
One utility that may not be on your investment radar is United Utilities (LSE: UU) (NASDAQOTH: UUGRY.US), the North West of England water (and electricity) supplier, but it could be worth substantially more than its current share price.
The main reason for this is its high yield. Indeed, shares currently offer a forward yield of 5.6%, which is above and beyond the FTSE 100 average of 3.6% and makes United Utilities the 5th highest yielding share on the FTSE 100 index.
In fact, the yield offered by United Utilities is around 55% higher than that of the index and, although utility companies are not known for their soaring earnings per share (EPS) growth, they do offer a relatively steady income and more stability than your average FTSE 100 stock.
So, it seems rather generous that United Utilities offers such a high yield relative to the wider market.
Indeed, if United Utilities were to come with a yield 25% higher than the FTSE 100 yield of 3.6%, it would mean its shares offering a yield of 4.5%. This would still be very generous and would trump inflation and bank account savings rates by some margin. More importantly, though, it would mean shares trade at a price of around 800p, which is just over 24% higher than their current price level.
Clearly, such a gain is not going to occur overnight. However, a yield of 4.5% would still be very attractive — even as interest rates tick up over the medium to long term. As such, United Utilities could be a sound medium to long term play, with gains of 24% on offer plus a very generous dividend yield.
Peter owns shares in United Utilities.