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3 Cornerstone Utilities For An Income Portfolio: National Grid plc, SSE PLC And Pennon Group plc

Regulated utilities, by their nature, offer good earnings visibility and enable management to target predictable dividends. These characteristics — together with lower share-price volatility than the wider market — make utilities an attractive proposition for investors seeking income at the lower end of the equity-risk scale.

The current dividend yields, policies and diversification offered by National Grid (LSE: NG) (NYSE: NGG.US), SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) and Pennon (LSE: PNN) make them, in my view, a terrific trio for an income portfolio.

National Grid

National Grid’s business is largely centred on the middle segment of the energy chain — transmission and distribution networks — as opposed to generation/production at the start of the chain and supply to customers at the end. About a third of National Grid’s operating profit comes from UK electricity transmission, a third from UK gas transmission and distribution, with the final third coming from the group’s regulated business in the US.

National Grid’s dividend policy is to raise the dividend each year “at least in line with” the increase in average UK RPI inflation over the preceding 12 months. The current policy will run “for the foreseeable future”.

Last week, in its annual results for the year ended 31 March, National Grid declared a final dividend of 28.16p a share, making a total payout for the year of 42.87p — a 2% increase on the previous year, in line with the average increase in inflation during the period. The dividend was covered 1.4 times by earnings, which is fairly typical for a utility.

At a currently share price of 918p, the trailing yield is 4.7%. Anyone investing in National Grid before the ex-dividend date of 4 June will be entitled to the final dividend, which will be paid on 5 August.

SSE

SSE’s business differs from National Grid’s in being centred exclusively on the UK and Ireland, and extending across the length of the energy chain. About a quarter of SSE’s operating profit comes from generation/production, about half from transmission/distribution, and a quarter from retail supply.

SSE’s dividend policy is linked to inflation in an identical manner to National Grid’s. SSE aims to deliver an annual increase that “at least keeps pace with RPI inflation”, and to do so “in 2015/16 and in the subsequent years”.

Last week, in its annual results for the year ended 31 March, SSE declared a final dividend of 61.8p a share, making a total payout for the year of 88.4p — up 2% on the previous year, and covered 1.4 times by earnings.

At a currently share price of 1,670p, the trailing yield is 5.3%. Anyone investing in SSE before the ex-dividend date of 23 July will be entitled to the final dividend, which will be paid on 18 September.

Pennon

Pennon adds further — and more substantial diversification — to the utility mix, being a regulated water company. Pennon owns South West Water, has recently acquired Bournemouth Water, and also owns renewable energy, recycling and waste management business Viridor.

Pennon’s dividend policy offers sector-leading annual increases: “4% year-on-year dividend growth over RPI inflation to continue to 2020”. While National Grid and SSE calculate RPI inflation on the basis of the average rate over the preceding 12 months (2% this year), Pennon takes the running monthly rate at the end of the period (0.9% in this case).

Last week, in its annual results for the year ended 31 March, Pennon declared a final dividend of 21.82p a share, making a total payout for the year of 31.8p — up 4.9% on the previous year, and covered 1.3 times by earnings.

At a currently share price of 860p, the trailing yield is 3.7%. While the current yield is lower than both National Grid and SSE, there is, of course, the compensation of probable higher annual increases. Anyone investing in Pennon before the ex-dividend date of 6 August, will be entitled to the final dividend, which will be paid on 2 October.

An equal investment in each of the three companies gives a blended yield of about 4.5%, with the prospect of annual income growth at least 1.3% ahead of RPI inflation for the foreseeable future. Which is why I think National Grid, SSE and Pennon are a terrific trio for an income portfolio.

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G A Chester has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.