Despite the UK recovery seemingly gaining strength, with the IMF recently upgrading forecasts for annual growth to a not inconsiderable 3.2%, the Bank of England seems reluctant to increase interest rates. Indeed, a lack of wage growth seems to be holding them back and, as such, interest rates could stay low for a good while yet.
National Grid reported today that it is on track to meet full-year expectations and, perhaps more importantly, that its long-term dividend plan remains intact. Indeed, National Grid is aiming to keep the rate of growth of its dividend per share payments at least in line with inflation, a target also adopted by SSE. This aim could turn out to be a major asset for investors, since it provides a degree of protection against high levels of inflation that, after all of the quantitative easing that has taken place, could become a reality over the medium to long term.
While sector peer, Centrica, does not adopt the same aim with regard to its dividends, the company is expected to increase them by 3.4% this year and by 3.2% in the following year. Both of these figures are likely to be ahead of inflation, which means that investors could benefit from above-inflation growth in their dividends.
Yield, Yield, Yield
Of course, dividend per share growth means little if the yield is inadequate. This is where National Grid, Centrica and SSE really come into their own. Indeed, partly as a result of uncertainty surrounding the future of electricity supply and distribution, the sector has suffered from weakened market sentiment, although this has dampened somewhat in recent months.
Still, the three companies trade on superb yields of 5.6% (Centrica), 6.1% (SSE) and 5% (National Grid), all of which easily beat the FTSE 100’s yield of around 3.5%. Furthermore, they are above and beyond the best high-street savings accounts, which offer little more than 1.5% unless you are willing to tie-up your money for several years.
Certainly, all companies come with risk and, as mentioned, for the utilities this is mainly political and results from uncertainty surrounding their futures. However, current yields appear to adequately price this in, making National Grid, Centrica and SSE appealing alternatives to low savings rates that understandably are a source of great frustration for investors and savers alike.
Peter Stephens owns shares of Centrica, National Grid, and SSE. The Motley Fool has no position in any of the shares mentioned.