One example of a company that arguably stands a better chance than most, however, is FTSE 100 water and wastewater business Severn Trent (LSE: SVT).

A quick glance at today’s trading update from the company goes some way to explaining why.

“No material change“

In contrast to the vast majority of listed companies, Severn stated this morning that it had seen “no material change” in terms of business performance from its last trading update (28 January) to the end of March.

As a result, the £5.5bn cap expects full-year numbers to be in-line with the guidance it previously issued.

How many other firms can say that at the current time?!

In response to the Covid-19 outbreak, Severn said that it is doing all it can “to keep essential services flowing“, particularly for hospitals, schools, and care homes. Only customer visits deemed “essential” are going ahead. 

Aside from this, the Coventry-based business said that it was “actively promoting” its vulnerable customer schemes for those experiencing financial difficulties as a result of the pandemic.

As positive as all this is, Severn did say that government restrictions brought in to minimise the spread of the coronavirus were likely to have “a material impact” on its non-household customers and the recovery plan of its WaterPlus business (a joint venture with United Utilities). This may go some way to explaining why shares were down this morning while the index as whole was up. 

Nevertheless, I have no concerns over Severn’s finances. Less than 2.5% of its debt requires re-financing in the current year. It also has £1.1bn in cash and committed facilities to see it through. 

Another option

Severn isn’t the only utility in the FTSE 100, of course. Environmental infrastructure company Pennon (LSE: PNN) is another option for cautious investors. 

Yesterday’s full-year trading statement was similarly reassuring. The company stated that performance over the last year (which includes the coronavirus crisis) had been in line with management expectations.

Like Severn, Pennon said that only essential customer visits are taking place and it is prioritising support to those most vulnerable.

Like Severn, it also said that its finances were in good order to weather the coronavirus storm. In fact, the recent sale of waste business Viridor for £4.2bn, expected to complete this summer, will pretty much wipe all debt from its balance sheet.

Priced in?

Based on their share price performance over the last month (-10% and -3% respectively), both Severn and Pennon look likely to remain relative ‘safe havens’ in this unpredictable environment. 

Assuming no additional crises hit, both should also continue to be good options for dividend hunters. If analyst predictions prove correct, Severn yields 4.4% for the financial year ending today. At its current share price, Pennon offers 4.1% (with, I suspect, a potential special dividend in the works).

Naturally, the only issue with all this is that neither company is cheap to buy. Severn trades at 19 times forecast earnings for the 2020–21 financial year. Pennon trades on a P/E of almost 21. As such, it’s unlikely either will soar in price when the coronavirus is overcome.

The post Looking for dividends while markets crash? I think these FTSE 100 stocks could be great buys! appeared first on The Motley Fool UK.

More reading

• Up 157% in 2026, are ITM Power shares the next Rolls-Royce?
• Buying 107,724 shares in this FTSE 100 dividend stock could double the State Pension
• With a forward P/E of 5.5, is the ‘King of Trainers’ a bargain-basement value share to consider buying now?
• How should FTSE 100 energy investors react to the UAE quitting Opec?
• Here’s the FTSE 100 share I’m targeting in May for passive income

Paul Summers 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.

In my view, there are much better options for income investors elsewhere in the FTSE 250. Today, I want to consider two companies that have cropped up on my investing screens.

Turning waste into cash

Water and recycling firm Pennon Group (LSE: PNN) is one of my top picks in this sector. The company — which operates South West Water and Viridor Recycling — said today that both arms of its business are performing well and are expected to deliver full-year results in line with forecasts.

One thing I like about this business is that it’s not just a water utility. Although the regulated water business should provide predictable returns to help support the group’s dividend, growth opportunities are likely to be minimal.

That’s not the case with recycling, in my opinion. This is an evolving sector that’s only partially regulated. Given our environmental concerns, recycling seems likely to become bigger and more important over the coming decades.

Although the Viridor business is exposed to market pricing for recyclate material, which can be volatile, I think the firm’s strategy of developing large-scale recycling and energy recovery facilities is likely to work well.

Pennon shares look attractively valued and the dividend hasn’t been cut for 12 years. With a 5.3% dividend yield on offer for the current year, I’d be happy to tuck some of these away.

Another 5% dividend grower

Pennon isn’t the only FTSE 250 firm with a long dividend history. Oil and energy services operator John Wood Group (LSE: WG) has increased its payout every year since 2005.

Despite this strong track record, the firm’s shares dipped recently after chief executive Robin Watson said that debt reduction “will be more gradual than originally anticipated.”

Wood Group has historically operated with fairly low levels of debt. But when it acquired rival Amec Foster Wheeler in 2017, it took on Amec’s £1bn net debt as well. Although the combined group’s total net debt fell from $2bn (£1.5bn) to $1.5bn (£1.2bn) last year, further reductions are expected to be slower. This is mostly because the oil and gas sector has not returned to growth as quickly as expected after the 2015 crash.

I’m not worried

I’m not concerned by this. Wood Group’s latest results suggest to me that its core attractions of strong cash generation and stable revenue remain intact. In my view, this is one of the best long-term picks in the energy services sector. The Amec Foster Wheeler deal has diversified the firm’s portfolio and should reduce its long-term dependency on oil and gas.

In the meantime, I think the current valuation reflects the lower pace of growth that’s now expected. At the time of writing, the shares were trading on 10 times 2019 earnings, with a forward dividend yield of 5.1%. I maintain my buy rating.

The post Forget the Royal Mail share price. Here are 2 FTSE 250 5% dividend stocks I’d buy appeared first on The Motley Fool UK.

More reading

• Up 157% in 2026, are ITM Power shares the next Rolls-Royce?
• Buying 107,724 shares in this FTSE 100 dividend stock could double the State Pension
• With a forward P/E of 5.5, is the ‘King of Trainers’ a bargain-basement value share to consider buying now?
• How should FTSE 100 energy investors react to the UAE quitting Opec?
• Here’s the FTSE 100 share I’m targeting in May for passive income

Roland Head owns shares of Royal Mail.  

Today, I’m going to look at three FTSE 250 stocks which fit this description. Each firm offers a dividend yield of at least 5%.

Water and waste

Arguably, nothing is more fundamental to modern life than the supply and management of water, waste and recycling. Western society could not function without these services. My favourite stock in this sector is Pennon Group (LSE: PNN), which owns South West Water and recycling and waste management firm Viridor.

I like the group’s twin focus on water and waste. The regulated income provided by South West Water should be regular and highly predictable. Alongside this, I believe waste management and recycling offer opportunities for growth. This potentially allows Pennon shareholders to enjoy the best of both worlds.

Tuesday’s half-year accounts suggested that this formula is still working well. Revenue rose by 3.1% to £746.7m during the period, while pre-tax profit was 2.9% higher, at £133.6m. A lower tax bill helped boost post-tax profit, lifting earnings per share by 17.4% to 25.6p.

Shareholders will be rewarded with a 7.3% dividend increase, which puts the stock on track to deliver a yield of almost 5.5% for 2018/19. In my view, Pennon shares rate as an income buy.

Global infrastructure

If you want exposure to a wider range of infrastructure projects in the UK and overseas, HICL Infrastructure Company (LSE: HICL) might be a better choice. This £2.9bn market cap firm invests about 71% of its cash in the UK, with the remainder spread across the EU, North American and Australia.

Projects include hospitals, schools, roads, wind farms and water treatment facilities. The average asset life is 30 years, providing good long-term visibility for income. The fund’s net asset value per share was 156.4p at the end of September, broadly in line with HICL’s share price.

Many of the firm’s projects provide contracted income streams that rise each year with inflation. This is reflected in HICL’s dividend, which has kept pace with inflation for a number of years.

The stock offers a forecast yield of 5% for the current year. Trading on 12 times forecast earnings and at 1x book value, I think the price is fair. I’d be happy to buy at this level.

A cash machine?

My final choice is a company that owns long-term financial assets which generate fairly predictable cash flows. Phoenix Group Holdings (LSE: PHNX) is an insurance firm which specialises in buying up closed books of life assurance policies from other insurers, and running them to completion.

The group recently took a step up in size when it acquired the life assurance business of Standard Life Aberdeen for £2.9bn. This deal is expected to generate an extra £5.5bn of cash flow, including £1bn between 2018 and 2022.

Management expects this improved cash generation to support continued dividend growth. Analysts’ forecasts suggest a payout of 46p per share this year, giving Phoenix stock a forecast dividend yield of 7.6%.

For investors who want to receive the majority of their shareholder returns in the form of cash income, I believe Phoenix could be a good long-term buy.

The post Have £3,000 to invest? Three FTSE 250 dividend stocks I’d buy today and hold forever appeared first on The Motley Fool UK.

More reading

• How big a Stocks and Shares ISA is needed to target a £2,932 monthly passive income?
• How many Standard Life shares must an investor buy to give up work and live off the income?
• Here’s how to invest £3k in the FTSE 250 for a 7.6% dividend yield
• Here are the secrets behind the FTSE 100’s success!
• How much could spending just £5 a day on UK shares earn in passive income?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group and Standard Life Aberdeen. 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.

However, I’m much more upbeat about the prospects of National Grid (LSE: NG), which is the FTSE 100‘s biggest utility by far, and FTSE 250 water company Pennon (LSE: PNN), which released a trading update today. Their respective dividend yields of 6% and 5.7% may not be as high as those of Centrica and SSE but they’re still very juicy. Moreover, I reckon National Grid and Pennon are better positioned to deliver the steadily increasing dividend payouts I expect from utility stocks.

Income and growth

There were no surprises in Pennon’s trading update for the six months to 30 September and management said it’s on track to meet expectations for the full year. There were no water restrictions for a 22nd consecutive year, with the company adding that its South West Water business continues to score highly on the customer experience survey. Strong delivery during the current five-year regulatory period bodes well for Ofwat’s determination for the upcoming 2020-25 period (due in December next year).

Pennon’s other division — waste business Viridor — is also performing well. It has three new energy recovery facilities in final commissioning as it sees further capacity as essential to meet longer-term demand in what is an attractive growth sector. Today’s trading update hasn’t moved the share price much and with the current high dividend yield and a reasonable price-to-earnings (P/E) multiple of 13.7, I rate the stock a ‘buy’.

Trading on the same P/E as Pennon and with a slightly higher dividend yield, National Grid is another stock I’d be happy to buy a slice of today. Its ownership and operation of vital UK infrastructure assets is an attractively stable monopoly position. In addition, it has geographical diversification and good growth prospects in the US. As such, like Pennon, it looks well positioned to deliver the earnings growth to support steadily increasing dividends in the coming years.

Elephant in the room

Current Labour Party policies directly impact Pennon (“replace our dysfunctional water system with a network of regional publicly-owned water companies”) and National Grid (“ensure that national and regional grid infrastructure is brought into public ownership over time.”)

There’s nothing in law to prevent nationalisation, but there are numerous hurdles and potential hurdles to implementing the policy. The key question for investors is, if the worst came to the worst and nationalisation went ahead, would I be fully compensated? There are a number of laws by which investors could challenge any below-value attempt at expropriation.

The most robust comes through the UK’s bilateral investment treaties (BITs) with foreign countries. These were original designed to protect UK investors from having assets expropriated in developing states without receiving “genuine value” in compensation. However BITs work in both directions. The right of foreign investors in UK utilities to full compensation should collaterally provide protection to British shareholders.

The post 2 top dividend stocks I’d buy right now appeared first on The Motley Fool UK.

More reading

• What on earth’s going on with the National Grid share price?
• How to turn a Stocks and Shares ISA into £10k of annual passive income
• Could National Grid shares offer me a dividend that won’t be hurt by inflation?
• The FTSE 100 looks a lot like the late ’90s. Are we heading for a 2000-style crash?
• £5,000 invested in National Grid shares 5 years ago is now worth…

G A Chester 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.

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.

The post No pension? Here are 2 FTSE 250 dividend stocks that could help you retire early appeared first on The Motley Fool UK.

More reading

• Up 157% in 2026, are ITM Power shares the next Rolls-Royce?
• Buying 107,724 shares in this FTSE 100 dividend stock could double the State Pension
• With a forward P/E of 5.5, is the ‘King of Trainers’ a bargain-basement value share to consider buying now?
• How should FTSE 100 energy investors react to the UAE quitting Opec?
• Here’s the FTSE 100 share I’m targeting in May for passive income

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.

However, with the FTSE 100 and FTSE 250 both having made gains in recent years, the valuations of some dividend growth shares seem to be excessive. With that in mind, here is one FTSE 250 dividend share that seems overpriced to me, as well as a FTSE 100 income stock which I feel could be worth buying for the long term.

Improving performance

The FTSE 250 share in question is Hilton Food Group (LSE: HFG). The specialist food packing business recorded a positive performance in the 28 weeks to 15 July, with it being in line with management expectations. It has continued to grow the business through additional volumes, as well as through close cooperation with retail partners.

In the last four years, the company has grown dividends per share at an annualised rate of 10%. This is an undeniably impressive performance, and shows that the company has sought to reward its shareholders at the same time as profitability has increased. And with the stock having a payout ratio of around 50% of earnings, further dividend growth could be ahead.

But despite its rapid dividend growth, Hilton Food Group appears to lack a margin of safety. It trades on a price-to-earnings (P/E) ratio of around 26, which suggests it is priced for rapid growth. But since its bottom line is due to rise by ‘only’ 8% this year and by 6% next year, it could prove to be a disappointing performer when it comes to capital returns.

Income potential

In contrast to that one, the income investing prospects of FTSE 100 water services company Pennon (LSE: PNN) seem to be highly appealing. The stock has a dividend yield of around 5% at the present time, and is due to raise dividends by 7% in the next financial year. Its stable track record of dividend growth suggests that inflation-beating income returns could be ahead over the medium term. This could appeal to a wide range of investors even though inflation has cooled in recent months.

While regulatory risk remains high across Pennon’s industry, the company appears to offer defensive characteristics relative to the rest of the FTSE 100. Although the current bull market may have a long way still to run, risks such as a trade war could mean that investor sentiment declines over the short run.

In such a scenario, the company could become increasingly popular due to its lower positive correlation with the performance of the wider economy. And with Brexit set to take place next year, it could offer a relatively certain income outlook in uncertain times.

The post Why I’d shun this FTSE 250 dividend growth stock and buy this FTSE 100 income share instead appeared first on The Motley Fool UK.

More reading

• Down 39.5%, this UK stock offers a 6.52% dividend yield for investors!

Peter Stephens owns shares of Pennon Group. 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.

With that in mind, here are two high-yield stocks which could be worth buying right now, helping to keep income returns above inflation.

Improving outlook

Reporting on Wednesday was multi-utility infrastructure and services provider Fulcrum Utility Services (LSE: FCRM). Its trading update for the financial year to 31 March showed that it’s executing its strategy. It’s also on track to perform in line with expectations, while acquisition activity remains high.

For example in February, the company acquired The Dunamis Group, an electrical infrastructure company. The integration is progressing well, with significant cross-selling opportunities on offer.

The company also announced the acquisition of CDS Pipe Services alongside its trading update. It provides a range of specialised engineering services and will be acquired for £1.4m. The deal will be satisfied through a mix of new shares in the company and cash, with the potential to act as a positive catalyst on its financial performance.

In terms of outlook, Fulcrum is forecast to post a rise in its bottom line of 5% in the next financial year. However, dividends are due to rise by around 25%, which puts the stock on a forward yield of around 4.2%. And since dividend payouts are covered 1.7 times by profit, there appears to be scope for them to rise further.

Impressive outlook

Also offering a high dividend yield at present is water services company Pennon (LSE: PNN). The company’s share price has declined by 32% in the last year as investors become increasingly cautious about the prospects for a wider utility industry. Regulatory change within the sector could lead to a squeeze on profitability, which is causing the market to include a wider margin of safety when valuing stocks.

This means that Pennon now has a dividend yield of around 7%. This is historically high for the company and is backed-up by a forecast earnings growth rate of between 10% and 12% over the next two financial years. This should allow dividends to increase by around 7% per annum during the same time period. As such, beating inflation could be relatively straightforward for investors in the company.

Furthermore, the stock has a current price-to-earnings (P/E) ratio of just 11.5. This suggests that it could be undervalued and has the potential to deliver capital growth as well as a high income return. While volatile and uncertain in the near term, the stock could prove to be a strong performer in the long run.

The post 2 high-yield stocks I’d buy right now appeared first on The Motley Fool UK.

More reading

• Up 157% in 2026, are ITM Power shares the next Rolls-Royce?
• Buying 107,724 shares in this FTSE 100 dividend stock could double the State Pension
• With a forward P/E of 5.5, is the ‘King of Trainers’ a bargain-basement value share to consider buying now?
• How should FTSE 100 energy investors react to the UAE quitting Opec?
• Here’s the FTSE 100 share I’m targeting in May for passive income

Peter Stephens owns shares of Pennon Group. 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.

OK, so four of those five steps are as easy as pie. The second — picking which companies to invest in — requires a bit of research and thought. To get you on your way, here’s one company I’d have no qualms about adding to my portfolio at the current time and one I’d probably steer clear of.

Mighty good dividends

Small-cap stocks won’t be for everyone but I think asset manager Miton Group (LSE: MGR) is definitely worthy of attention from those with a fairly high tolerance for volatility and capital risk. 

But what about those dividends? Well, as a result of recent performance and confidence in the future, management saw fit to hike the total dividend by a huge 40% last week to 1.4p per share. This equates to a yield of 3.2% based on the current share price.

Tempted? You’ll need to be quick. The ex-dividend date is 29 March — three days from now.

With a forecast yield of around 4% for the new financial year and shares trading at just 11 times predicted earnings, the investment case for Miton looks compelling.

Big spender

If Miton is a stock I’d strongly consider buying, environmental infrastructure firm Pennon Group (LSE: PNN) is one I’m avoiding for now. That’s despite today’s trading update stating that the company’s performance for the year to the end of March had been in line with management expectations.

South West Water — owned by the £2.5bn cap — continued to do well over the last year and the company believes it is“well-positioned to respond” to new price limits from regulator Ofwat. Elsewhere, the FTSE 250 constituent’s Energy Recovery Facilities (ERFs) have been performing “above base case expectations” and demand for these is expected to exceed capacity “into the long term“.  

On the downside, Pennon revealed that the construction of its ERF in Glasgow is likely to cost £95m more than the £155m originally targeted due to the termination of its contract with Interserve. As a result of changes to China’s import regulations, it also expects a drop in H2 earnings from its recycling operations (although not enough to significantly impact on performance).

Trading at just 12 times predicted earnings following a near 40% drop in its share price since last May, Pennon’s valuation is undeniably attractive, as is the tasty 6.6% yield on offer. That said, the extent to which payouts are likely to be covered by profits continues to look rather low. While I’m sensitive to the argument that the resilient nature of its business negates such a concern, I’m content to sit on the sidelines until the company’s level of capital expenditure drops (due next year) and free cash flow starts to look healthier.

The post One bargain dividend stock I’d buy for my ISA today (and one I’d avoid) appeared first on The Motley Fool UK.

More reading

• Up 157% in 2026, are ITM Power shares the next Rolls-Royce?
• Buying 107,724 shares in this FTSE 100 dividend stock could double the State Pension
• With a forward P/E of 5.5, is the ‘King of Trainers’ a bargain-basement value share to consider buying now?
• How should FTSE 100 energy investors react to the UAE quitting Opec?
• Here’s the FTSE 100 share I’m targeting in May for passive income

Paul Summers 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.

Foreign control

Unless you’ve shunned even the most basic of privileges that modern life has to offer, then you’ll no doubt be accustomed to the reliable flow of running water from your kitchen and bathroom taps, and not be too worried about where it goes once you’ve finished with it. Chances are you’re just one of tens of millions of customers of one of the UK’s regional water companies.

These giant utility firms are effectively run as regional monopolies, making them very attractive investments indeed. In fact, of the 10 original water authorities in England & Wales that were privatised back in 1989, only three remain listed on the London Stock Exchange. The rest have been completely taken over and are no longer publicly listed, with some even under foreign control.

Predictable inflation-proof income

So what is it about our boring water businesses that proves to be so irresistible to overseas investment funds and foreign consortia? The answer is a steady stream of predictable inflation-linked income.

Industry regulator Ofwat determines how much water companies can charge customers in exchange for services and further investment, with five-year regulatory settlements providing investors with a heads-up on future earnings. In an age of uncertainty that’s very reassuring indeed.

Mouth-watering income

United Utilities remains the largest of the three remaining London-listed water companies, valued at £4.5bn, and you can read my most recent appraisal of the business here. Next in terms of size is Severn Trent (LSE: SVT), the only other water and sewerage company listed in the FTSE 100 index.

The Coventry-based utility giant provides water and wastewater services to residents and businesses across the heart of the UK, as far north as Scunthorpe, and as far south as Gloucester, and even includes parts of Wales.

Last year, the group upgraded its dividend policy to deliver growth of at least the Retail Price Index (RPI) plus 4%, taking the forecast FY2018 payout to 86.64p per share. After the recent dip in the share price, that equates to a mouth-watering yield of 4.9%.

Energy from waste

For those looking for an even higher return on their investment then FTSE 250-listed Pennon Group (LSE: PNN) could be the answer to your prayers. The Exeter-based group is the owner South West Water, which provides water and wastewater services to Devon, Cornwall and parts of Dorset and Somerset.

Like its larger peers Pennon operates as a virtual monopoly within its own defined geographical area, but it also has the added attraction of being a leader in delivering energy from waste through its Viridor subsidiary.

Management hhasve pledged to grow the group dividend by 4% above inflation each year at least until 2020. With analysts having pencilled-in a full-year payout of 38.56p per share for FY2018 this equates to a nice fat low-risk return of 6%.

The post 2 top dividend stocks I’d buy with £1,000 today appeared first on The Motley Fool UK.

More reading

• Up 157% in 2026, are ITM Power shares the next Rolls-Royce?
• Buying 107,724 shares in this FTSE 100 dividend stock could double the State Pension
• With a forward P/E of 5.5, is the ‘King of Trainers’ a bargain-basement value share to consider buying now?
• How should FTSE 100 energy investors react to the UAE quitting Opec?
• Here’s the FTSE 100 share I’m targeting in May for passive income

Bilaal Mohamed has no position in any 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.

As such, stocks such as water services company Pennon (LSE: PNN) could be worth a closer look. It has a bright dividend future, but isn’t the only stock which could deliver rising shareholder payouts in the long run.

Improving outlook

Pennon continues to offer a potent outlook of defensive dividend growth. The company’s business model is highly reliable and with lower positive correlation to the wider economy than many of its index peers, it could prove popular among investors should the outlook for the UK economy deteriorate. In such a scenario, investors may seek a ‘flight to safety’ which could include defensive assets such as those in the water services sector.

However, the company is more than just a defensive share. It offers strong dividend growth potential, too. For example, shareholder payouts are expected to rise by 7.2% next year as the company’s profitability is forecast to increase at a double-digit rate. Despite this, the company’s dividends are still due to be covered 1.3 times by profit. This suggests they are highly sustainable and could continue to rise at an inflation-beating rate in the long run.

With Pennon trading on a price-to-earnings (P/E) ratio of 16.6, it appears to have value appeal. Therefore, it could deliver high total returns in the long run following its 12% share price fall in the last year.

Low valuation

Also offering high dividend growth potential is electronic and software specialist Ultra Electronics (LSE: ULE). It reported news of a contract win on Wednesday, with the company being awarded a $16.2m modification to a previously awarded cost-plus-fixed-fee contract by the US Department of the Navy.

Under the terms of the contract, Ultra Electronics will continue to work with the US Department of the Navy to design, develop, integrate and install a variety of cyber-security systems for critical infrastructure control and monitoring. The solutions provide cyber proofing of a number of industrial control systems and electronic security systems in mission critical environments.

Looking ahead, Ultra Electronics is expected to increase its dividend payments by 5% per annum over the next two years. This puts it on a forward dividend yield of 2.9%. With dividends due to be covered 2.7 times by profit next year, there appears to be significant scope for further increases in shareholder payouts. With a price-to-earnings growth (PEG) ratio of just 1.6, the stock looks set to deliver a potent mix of high capital growth and income returns in the long run.

The post Pennon Group plc isn’t the only dividend growth star that could make you rich appeared first on The Motley Fool UK.

More reading

• Up 157% in 2026, are ITM Power shares the next Rolls-Royce?
• Buying 107,724 shares in this FTSE 100 dividend stock could double the State Pension
• With a forward P/E of 5.5, is the ‘King of Trainers’ a bargain-basement value share to consider buying now?
• How should FTSE 100 energy investors react to the UAE quitting Opec?
• Here’s the FTSE 100 share I’m targeting in May for passive income

Peter Stephens owns shares in Pennon. The Motley Fool UK has recommended Pennon Group and Ultra Electronics. 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.