With interest rates unlikely to move higher at a rapid rate in the next few years, dividends are set to remain of great importance for a large number of investors. The good news is that there is a wide range of high-yielding stocks available in a number of sectors, with utility stock United Utilities (LSE: UU) arguably being one of the most reliable payers around.
A key reason for this is the defensive profile of water companies. They come with a lot less political risk than their domestic energy peers, at least in part because the supply of water is not subject to the same swings in pricing as is the case for gas and electricity production. As such, consumers rarely seem to complain about the cost of water, which means that United Utilities is a much more solid investment than many of its sector peers.
Although the water liberalisation which is due to come into place next year is a potential cloud on the horizon, United Utilities appears to be well-placed to overcome major change. And with its dividend yield standing at 4.2%, it continues to offer a superior income return compared to the wider index.
With United Utilities trading on a price to earnings (P/E) ratio of 20.3, it is not particularly good value at the present time. However, with its bottom line due to grow by 8% next year, there is still upside potential –especially if market volatility continues and defensive stocks remain in vogue.
Also offering a high yield right now is Shell (LSE: RDSB), at an incredible 8.4%. Clearly, there is a risk that there will be dividend cuts over the coming years, since the current oil price level means that Shell’s profitability may come under pressure. However, with dividends due to be fully covered by profit next year, the reduction in payouts may be less than the market anticipates.
While Shell is a much riskier proposition than United Utilities, owing to the uncertainty of the oil and gas sector, it has the potential to strengthen its position relative to sector peers. Much of that is due to the company’s sound financial standing, which is allowing it to purchase BG while asset prices are low and to also make further acquisitions should it need to do so. With Shell trading on a P/E ratio of 13.4, it seems to offer good value for money and its income prospects, while uncertain, seem sound.
Scope for increases
Meanwhile, engineering company IMI (LSE: IMI) is also experiencing challenging trading conditions. The engineering company counts the energy industry as a major customer and with spending across the sector falling, IMI’s profitability for the 2015 financial year is expected to be at the lower end of market expectations when it reports on Friday. As such, its share price could be volatile in the short run.
However, in the longer term IMI offers excellent income prospects, with the company having an excellent track record of increasing dividends in each of the last four years. At the present time it yields 4.7% from a dividend which is covered 1.4 times by profit. This indicates that there is scope for increases in dividends moving forward, while IMI’s P/E ratio of 15.1 indicates that its shares offer fair value at their current price level.
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Peter Stephens owns shares of Royal Dutch Shell and United Utilities. The Motley Fool UK has recommended IMI and Royal Dutch Shell. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.