If you’re nearing retirement, you may be worried that the state pension won’t provide enough income for you to live on. One possible solution is to invest some cash in dividend stocks.
Investing in a range of good quality defensive stocks could provide you with a reliable 4%-5% income to help top up your pension.
Although dividend payments are never guaranteed, utility stocks are popular with income investors for their high yields and income focus. Today I’m looking at two companies from the FTSE 250 which offer attractive yields and have growth potential.
Forecasts unchanged despite disruption
Shares of coal-to-biomass power generator Drax Group (LSE: DRX) fell by around 6% in early trade this morning after the group said that underlying earnings fell from £9m to £7m during the first half of the year.
The shortfall was due to outages caused by a fire at a rail depot in December, and a generator failure in February. These events cut electricity generation, reducing half-year earnings from this part of the business by about one third.
Despite these one -off events, profit guidance for the full year is unchanged. Chief executive Will Gardiner is still confident enough to recommend a 14% increase in the interim dividend, to 5.6p per share.
Renewable focus could pay off
The group is currently commissioning a third biomass pellet factory in the USA, and is in the process of converting its fourth generating unit from coal to biomass fuel.
Mr Gardiner now hopes to get planning permission to convert the group’s two remaining coal generating units into gas-fired generators. A complete exit from coal will be required by 2025, when coal generation will be outlawed in the UK.
Drax’s transformation away from coal is still a work in progress. But the group’s performance is improving and management are working hard to rebuild the dividend, which now offers a 2018 forecast yield of 3.9%.
The acid test may come in 2019, when analysts expect earnings to rise by 118%, from 9.4p to 20.5p per share. If Drax can hit these forecasts, the group’s strategy will be vindicated. I think the evidence so far is encouraging. I’d consider this stock as a long-term buy for income and growth.
A safer alternative?
Drax hasn’t yet achieved the kind of stable, reliable profits investors often look for from utility stocks. One company that has done is water and waste firm Pennon Group (LSE: PNN).
Pennon owns South West Water and the Viridor waste management and energy recovery business. While the group’s water utility provides fairly reliable profits, energy recovery is a fast-growing area. This involves using waste that formerly went to landfill to generate electricity and heat.
The Exeter-based company is in the process of bringing four new Energy Recovery facilities into operation. Management says that Viridor’s expansion will support Pennon’s earnings growth to 2020 and beyond.
As with Drax, Pennon’s diversity appears to be offering investors a chance to receive utility-style dividends and enjoy some growth. The group’s underlying pre-tax profit rose by 3.5% to £258.8m last year. Analysts expect a similar level of growth in 2019 and 2020.
The shares currently trade on about 14 times forecast earnings, with a prospective yield of 5.4%. In my view, this could be the best buy in the utility sector for long-term investors.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.