Why Centrica PLC (5.9%), National Grid plc (5%) And SSE PLC (6.3%) Are Still The Best For Dividends

When the price of oil is high and home energy bills are steep, the utilities firms get it in the neck for daring to make a profit for their shareholders. But it’s times like now when oil is low that they look like especially good investments to me.

With UK wholesale energy prices having tumbled to a five-year low, we could be looking at a great time to lock-in some long-term dividend income, even if the energy firms are under pressure to cut prices further.

Look at Centrica (LSE: CNA), for example. Its shares have lost 20% over the past 12 months to 208p, and 36% over two years. But for income seekers, that’s helped push the expected dividend yield for the year just ended to 5.7%, with a hike to 5.9% on the cards for 2016, even though in cash terms it’s fallen from 2013’s peak of 17p per share to an expected 12.4p in 2016. The dividend looks reasonably well covered too, with cover by earnings of around 1.4 times.

Whatever fads and fashions come along in investing, it’s the companies providing essential services that are the most reliable over the long term. And energy suppliers, which have clear longer-term visibility of their likely income streams, should be among the steadiest of dividend payers.

Beating inflation

The same is true of National Grid (LSE: NG), which has been paying dividends of 5% and better for years, with a policy of raising them every year at least in line with RPI inflation. With the share price having picked up in the past six months to 926p, the forecast yield for the year to March 2016 currently stands at around 4.8%, with a rise to 5% predicted for the year after.

Cover by earnings is similar to Centrica’s, standing a little below 1.4 times, and that should be ample.

To see the real long-term value of an investment in National Grid, if you’d bought the shares five years ago you’d be sitting on a very nice 74% price gain today. And you’d be set to enjoy effective dividend yields, based on your original purchase price, of 8% this year and 8.25% next.

The highest

There’s an even bigger potential yield up for grabs from SSE (LSE: SSE), with 6.3% pencilled-in for the year to March, increasing slightly to 6.4% in 2017. Again this is a company with a policy of lifting its dividend at least in line with RPI inflation, and again we’re seeing adequate cover by earnings. It’s a little lower at slightly less than 1.3 times, but that’s good enough.

Earnings at SSE have only been growing relatively slowly and we have a small fall expected this year followed by a modest recovery the year after. But as a steady cash cow providing regular high income, it’s looking like a solid investment to me.

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Alan Oscroft has no position in any shares mentioned. 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.