MENU

2 Labour-Proof Stocks: National Grid plc And United Utilities Group PLC

If they haven’t done so already, shrewd investors will soon be looking at their portfolios and anticipating what effect the General Election might have. Whilst an uncertain outcome could cause volatility in the markets, it’s the potential for a Labour administration that is likely to have most impact on stocks.

Whatever the macro-economic effect, the government would be less business-friendly and some sectors — including energy companies, banks and the railways — are already in Labour’s sights.

Price controls

Energy firms have been vulnerable since the party conference in September 2013, when Ed Miliband promised a price freeze and break-up of the Big Six. Shares in Centrica and SSE immediately dropped 7% and continued to drift down for the rest of that year. Shares in hydro-powered electricity firm SSE have held their ground since, whilst vertically integrated gas firm Centrica’s woes have been compounded by the low oil price and unseasonably warm weather. I continue to hold both — they are well-managed companies of strategic value, owning large chunks of critical infrastructure — but the near-term risk remains on the downside.

Meanwhile, one utility sailed through this political controversy unscathed. National Grid (LSE: NG) (NYSE: NGG.US) doesn’t have any retail customers so there are less headlines in attacking it, for politicians of any hue. And it reached settlements with UK regulator Ofgem in 2012/13 which lasts for eight years — that takes it beyond the reach of the next parliament. NG is permitted to earn a fixed return on its regulated assets, which are growing at 7% a year as it replaces creaking infrastructure and wires up remote wind farms. The bottom line is a growing and safe earnings stream, a yield of 4.9% at current prices, and a policy to increase the payout at least in line with inflation “for the foreseeable future”.

Buy now while stocks last…

Earlier this year, the water companies reached a regulatory settlement with Ofwat which runs to 2020 — also taking them out of the firing line of publicity-seeking politicians. So attractive is the UK water sector that most companies have been snapped up by private equity or foreign government agencies, with just United Utilities (LSE: UU) and Severn Trent remaining as pure-play listed companies. United Utilities got a better deal, avoiding Severn Trent’s fate of cutting its dividend, and now offers a 4.1% yield inflation-proofed for five years.

Those yields look worth locking in as both NG and United Utilities are, for the next few years, as defensive as any company on the market. They certainly would add ballast to a portfolio ahead of the political risk that many UK companies may be facing.

Reinvesting dividends like that can make you seriously wealthy, in the slow-but-sure style of investing that beats most get-rich-quick ideas. But it's vital to pick shares that will reliably pay dividends over long timescales. If that's your approach to investing, I recommend you take a look at 'How to Create Dividends for Life', an exclusive report from the Motley Fool packed with advice and tips on how to maximise the benefit from the compounding effect of dividend reinvestment. You can download it by clicking here. It's free and completely without obligation.

Tony Reading owns shares in National Grid, Centrica and SSE. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.