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Why I’d pick the SSE and Centrica share prices to beat my State Pension

Are you worried about having to live on the State Pension of only £8,546 per year? It’s only around a third of the national average wage, and the time we’ll have to wait before we receive it is getting ever longer. I really wouldn’t be surprised if the State Pension age reaches 70 before too much longer.

You really need to get your own investments in place, and I reckon buying top UK stocks inside a SIPP or an ISA (or a combination) is the way to go. And with the current economic uncertainty we face, I’m making a list of safe dividend-paying shares.

Buy when others are fearful

I reckon utilities like SSE (LSE: SSE) are great for long-term income, even though the highly-regulated market is exposed to far more competition these days. The big beauty of a company like SSE is that it has very clear visibility of its income and expenditure, and it’s significantly less likely than many other FTSE 100 companies to face short-term ups and downs.

The dividend yield is forecast at 8.5% for the current year to March 2019, though with this year’s earnings expected to drop, the following two years’ dividends will be lower. It’s the first time SSE has had to cut its dividend, and the market doesn’t like it — over the past two years, the SSE share price has fallen by 24%.

But, as Roland Head points out, the tables appear to be turning and smaller competitors in the energy business are going bust. That’s why, in my view, pension cash should go into the biggest and strongest market leaders — the flash-in-the-pan ones offering unsustainable short-term deals to attract customers are rarely the long-term winners.

With the SSE share price having fallen, forecasts for the 2019-20 year and beyond indicate dividend yields of better than 7% per year, as the City expects SSE’s earnings to recover. That level of yield is even after the dividend cut, and I judge rising earnings levels as sufficient to keep it sustainable.

Is the worst yet to come?

Another in the utilities sector that I’ve been watching is Centrica (LSE: CNA) which, as Rupert Hargreaves reports, has produced a dreadful overall return over the past decade. And, over the past two years, the share price is down 40%.

Centrica has seen its earnings collapse over the past few years, with EPS for the year ended in December 2018 expected to come in at only around two-thirds of its 2014 level.

The British Gas owner has been attempting a turnaround, and analysts are suggesting that earnings should start to tick up again from 2019, though only by single-digit percent rises so far, and that’s still a cautious outlook (and way behind forecasts for SSE).

I also see pressure on the dividend, even though the company has said it expects to maintain its 2018 dividend at 12p per share. It wouldn’t be covered by earnings, and even forecast cover in 2019 would still be razor thin.

I think Centrica should also benefit from the competition squeeze, and its recovery could make it a tasty retirement investment now. And the market seems to be coming round, as Centrica shares have beaten the FTSE 100 in 2018.

I’m just that little bit less confident, and I want to see 2018 results first.

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Alan Oscroft has no position in any of the shares 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.