I wouldn’t like to build my retirement on cash, given today’s near-zero returns. But FTSE 100 stocks look much more tempting. Although dozens have scrapped or suspended their dividends this year, plenty are standing by their shareholder payouts.
Dividend stocks are so attractive because they don’t just give you a regular income, but a rising income, as companies aim to increase their payouts over time. This will help your spending power keep up with inflation. By contrast, money held in cash is likely to erode in real terms. The following two FTSE 100 utility company stocks look dependable income bets for my portfolio.
Water and wastewater specialist United Utilities Group (LSE: UU) offers plenty of buoyancy, despite the stock market storms in March. This FTSE 100 stock now trades 5.4% higher than a year ago, against a drop of 15% across the index as a whole.
Shun cash to buy UK shares
This week, it increased its dividend despite a 16% fall in first-half underlying profit after tax to £174m. The profit drop was due to new price controls and increased infrastructure spending. Covid-19 may have an impact if customers will struggle to pay their bills and bad debts rise. This hasn’t happened yet, but 2021 is likely to be the crunch year. Management still believes existing provisions are enough though.
Crucially for those buying FTSE 100 stocks to generate a passive income in retirement, the board increased the dividend by 1.5%. This is in line with its policy of increasing shareholder payout each year, in line with the CPIH inflation measurement.
Right now, United Utilities yields 4.4%, covered 1.5 times by earnings. That’s far more than I could dream of getting on cash. Naturally, shares are riskier than leaving money in the bank, but United Utilities is relatively safe as FTSE 100 stocks go. A P/E valuation of 14.5 times earnings looks tempting to me.
Sticking with the theme, I’d also include water utility and waste management specialist Pennon Group (LSE: PNN) in my passive income portfolio. Again, this FTSE 100 stock escaped the worst of the March crash and trades around 3.5% higher than a year ago.
I’d buy FTSE 100 stocks for income
Pennon has just announced a 14.5% drop in half-year underlying pre-tax profits, to £86.7m. This was expected, as business customers used less water during the lockdown. It’s now flushed with cash after receiving £3.7bn from the disposal of Viridor. The money will allow it to pay down debt, top up its pension scheme, and still have £2.7bn in the coffers.
The downside of the Viridor sale is that Pennon is now dependent on its South West Water business to fund dividends. The yield is forecast will fall from 4.5% to 2.1%, although it will continue to be increased by CPIH plus 2%.
So what will it do with the cash? Buying Southern Water is one option and that would boost dividends. The other is directly returning spare cash to shareholders. Given the uncertainty, of these two FTSE 100 stocks, I’d rather buy United Utilities today. But I’m keeping a close watch on Pennon.
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Harvey Jones 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.