Is Centrica PLC A Super Income Stock?

With interest rates still at rock bottom and inflation being a persistent threat, shares such as Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) have proven to be very popular in recent years, as many investors have sought to generate additional income from their portfolio.

Indeed, Centrica’s yield of 5.3% makes it the 3rd highest yielding share on the FTSE 100. This is partly a result of shares having had a tough few months, with comments made by politicians surrounding the fate of the energy sector causing the share price to underperform the wider market.

centrica / sseMuch of this political risk now appears to be priced in, as can be seen in Centrica offering a yield that is over 50% better than that offered by the wider index (the FTSE 100’s yield is currently around 3.5%).

However, what sets Centrica apart as a super income stock is not only its high yield, both on a standalone basis and relative to its peers, it is the increase in dividends per share that are forecast to come through over the next two years.

Indeed, Centrica is forecast to increase dividends per share by 4.6% in 2014 and by 3.9% in 2015. With inflation being around 2% at the moment, Centrica appears to not only offer a great return to income-seeking investors (due to its high yield) but also an inflation-busting increase in dividends per share, too.

Furthermore, Centrica is not struggling to make its dividend payments. It could have made them 1.5 times in 2013 and, looked at from another perspective, it could be argued that there is scope for dividends per share to be increased at an even faster rate than is forecast. While it currently pays out just under two-thirds of profit as a dividend, this proportion could be increased and leave shareholders with an even better yield while still leaving Centrica with sufficient capital to reinvest in the business.

With shares currently trading on a price to earnings (P/E) ratio of just 12 (versus 13.5 for the FTSE 100) they appear to not only offer a great yield, but decent value, too. More importantly, though, impressive dividend per share growth and the potential to pay out a greater proportion of profits as a dividend mean that Centrica is a super income stock.

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Peter owns shares in Centrica.