If you are looking for an income stock to include in your pension portfolio, you can’t go wrong with United Utilities (LSE: UU).
In my view, this is one of the most attractive income stocks in the FTSE 100 because it is one of the market’s most defensive businesses.
Time to buy?
That being said, the company is not without its problems. Analysts are worried about the impact increased regulation will have on earnings and management believes the group will see a 10.5% reduction in average bills between 2020 and 2025, which will certainly put pressure on margins.
However, despite this mixed outlook, the City is forecasting impressive earnings per share (EPS) growth of 15% for the financial year to the end of March 2019. EPS are expected to jump a further 10% the following year.
As well as earnings growth, the company’s dividend is also expected to increase in the years ahead. Although analysts believe payout growth will be limited to between 1.7% and 2.9%, current forecasts indicate a prospective dividend yield of 6% for fiscal 2020.
So, even though United’s outlook is mixed, I believe the company’s dividend credentials more than make up for the additional uncertainty.
Anglo American (LSE: AAL) is another dividend champion that I believe could help you double your income in retirement.
Anglo operates in a different sector to United, but both companies have similar favourable qualities.
For example, income at both is linked to inflation as commodity prices have historically increased in line with inflation. What’s more, as the world economy and population both grow, demand for commodities will only expand. In fact, you could argue that Anglo is a defensive business for this reason. The firm’s position in the copper industry is particularly attractive. As the world becomes ever more connected, demand for copper is set to explode.
What I really like about Anglo right now is its low valuation. The stock is currently trading at a forward P/E of just 9.2, which gives a wide margin of safety in my opinion. On top of this, there’s a dividend yield of 4.7% on offer and with the payout covered 2.3 times by EPS, leaving plenty of scope for dividend growth in the years ahead.
Margin of safety
My third and final pick is Kingfisher (LSE: KGF). Even though this company has fallen on hard times recently, its dividend credentials are some of the best around.
The payout is covered 2.2 times by EPS and the current yield is 4.2%. What’s more, there is no debt on the balance sheet — the company has a net cash position of £92m. This cash cushion gives me confidence that management can maintain the dividend at its current rate even if earnings fall.
Unfortunately, EPS are expected to tick slightly lower this year, falling by 2.2% to 23.8p. However, analysts have pencilled in growth of 19.3% for the following year, which if achieved, will leave the shares trading at a forward P/E of just 9. If the firm meets or beats this target, I believe the shares should re-rate as investor confidence returns.
Personally, I think Kingfisher’s stock is great value at current levels and shareholders could see a substantial upside if the company is able to return to growth.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.