Boring but brilliant

International distribution and services specialist Bunzl (LSE: BNZL) is one candidate to consider. The items it handles — think food packaging and cleaning supplies — won’t set the pulse racing. But it’s partly because these things are essential that management has been able to keep raising the dividend year after year.

That said, existing investors will be wanting to forget 2025. Weaker demand in its biggest market (North America) pushed many to the exits. By the end of December, the share price had fallen by 40% or so.

But if there’s one good thing to come from all this, it’s that Bunzl shares are currently cheaper than usual. A price-to-earnings (P/E) ratio of 13 is significantly below the firm’s five-year average P/E of 19. And those dividends? Unless trading falls through the floor, the 3.4% income looks safe for now.

This stock probably won’t recover in value quickly, especially if cost inflation keeps shrinking margins.

However, as a more-reliable-than-most source of passive income, I think it takes some beating.

Steady income

Getting exposure to a utility stock or two is also worth pondering. Yes, we know that cash distributions by any company can never be guaranteed. But the beauty of firms in this part of the market is that their business models are stable and earnings are relatively predictable.

This is why my second pick is water firm United Utilities (LSE: UU).

Like Bunzl, United has been raising its dividend for multiple years. We’re not talking explosive growth — an average of 4% every year, in line with inflation. But I reckon most income investors would prefer consistency over the former.

Right now, the forecast dividend yield for FY27 stands at 4.1%. That’s solid if not exactly flashy. It’s also more than someone would get from owning a FTSE 100 tracker. In direct contrast to Bunzl, United’s share price has also been rising very nicely in recent times (+24% in the last year).

Risks here include the tight leash of the regulator and high debt due to huge capital expenditure requirements. But these are par for the course in this space.

FTSE dividend growth star

A final example of a company with a great track record for raising dividends is wealth manager Rathbones (LSE: RAT).

Supported by high margins and the fairly recent merger with the UK arm of Investec, the growth rate here averages out at around 6%–7% per year. What’s more, analyst projections have it yielding 5.1% this year.

However, Rathbones isn’t a nailed-on winner. A market crash could see clients pulling their money out, leading to a reduction in fees and eventual profit. That could slow future dividend growth and might even lead to a cut. Even in good times, the £2.3bn cap operates in a competitive industry.

But that is precisely why I’ve made sure that all three mentioned here work in different sectors. In theory, spreading money around the market in this way makes it less likely that the income stream will ever dry up completely.

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The Bank of England recently chose to hold the base rate steady at 4%, but with inflation easing and the economy slowing, most analysts expect further reductions in the next 12 months. That could be good news for a number of dividend-paying stocks that have been under pressure in recent years.

I’ve picked out three British shares I think are worth investors considering in a lower-rate environment.

Segro

Segro‘s (LSE: SGRO) a real estate investment trust (REIT) that specialises in warehouses and industrial logistics, but it’s also making moves into growth areas such as data centres. Some reports suggest global spending on data centres could hit $7trn over the next five years, which would be a major growth driver for the business.

At around 649p, Segro’s share price is down 26.8% in the past year and trades at a big discount to its trailing net asset value (NAV) of 891p per share. Its dividend yield of 4.62% isn’t among the very highest, but it’s been increased for 11 consecutive years and is well-covered by both earnings and cash flow.

For me, that reliability makes Segro a stock investors may want to weigh up. The risk here is that higher financing costs in the commercial property sector could drag on profitability, especially if demand for space doesn’t pick up as quickly as expected.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Diageo

The Diageo (LSE: DGE) share price has had a tough few years, falling 30% since September 2020. At around £17 per share, it’s trading close to a 10-year low. Inflation’s squeezed consumer spending on non-essential goods like alcohol, with many households shifting towards cheaper alternatives.

However, falling interest rates could help bring inflation under control and boost consumer confidence. That in turn may lift spending on premium brands, which is where Diageo excels. Right now, its dividend yield stands at 4.5%, covered by earnings, and while growth was paused this year, the payout has risen at an average annual rate of 5.4% since 2010.

That said, investors should consider the risks. If inflation persists longer than expected, or if emerging markets weaken, Diageo’s recovery could take longer. Still, I think it’s an interesting stock to check out for those seeking reliable dividends in consumer goods.

United Utilities

United Utilities hasn’t been hit too hard compared to other sectors, with shares up 6.8% year to date. But it still stands to benefit from rate reductions as lower borrowing costs would ease the strain on its heavily capital-intensive operations.

Its dividend yield’s 4.62% and it boasts 14 consecutive years of growth. The concern is that the payout ratio sits at 133% and the company holds a lot of debt. If earnings fall any further, there’s a genuine risk of a dividend cut.

Even so, with a forward price-to-earnings growth (PEG) ratio of 0.27, the stock looks attractively valued. Earnings are already up 109% year on year and are expected to continue growing. Even if interest rates remain steady, there’s a strong chance the share price would benefit from this growth.

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Subscriptions to Cash ISAs spiked 26% in the 2023/24 tax year, according to HMRC. Stocks and Shares ISA subscriptions rose 7%, while Lifetime ISA subscriptions leapt 27%.

A whopping £69bn was held in Cash ISAs in 2023/24 compared to £31bn in Stocks and Shares ISAs. Given their simplicity and safety, the popularity of these cash products is obvious.

But prioritising the Cash ISA as part of one’s investing strategy could be an expensive mistake over the long term. And especially with interest rates tipped to fall further over the next 12 months.

Here’s why I think an investing ISA could be a better way to consider building wealth for retirement.

Spreading things out

I hold one of each of the ISAs I’ve described. I have cash in a Cash ISA and a Lifetime ISA to manage risk across my portfolio. The former gives me access to emergency cash as and when I need it. The latter gives me a handy 25% government top-up for my contributions (which can total £4,000 a year).

These products save me from paying tax on any interest. The problem, however, is that on their own, they’re unlikely to make me enough money to eventually retire comfortably.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

This is why the lion’s share of my extra cash at the end of the month goes in my Stocks and Shares ISA and/or my Self-Invested Personal Pension (SIPP). Within these products I hold a range of shares, trusts, and funds. And like those other ISAs, I enjoy enormous tax benefits (i.e., shelter from capital gains and dividend tax).

Wealth gap

With a Stocks and Shares ISA, I can realistically target an average annual return of roughly 9%, historical data shows. With a Cash ISA, I’m more likely to make a return closer to 1%.

The power of compounding means the growth potential of both accounts is enormous. The cash account would turn £500 a month saved over 25 years into £170,335. The investing account, on the other hand, would generate a significantly greater £560,561.

Okay, buying shares involves greater risk than putting money in a cash account with a guaranteed return. But investors can effectively manage the risk to their money with a diversified portfolio of companies spanning regions and sectors.

They can also buy shares that operate in defensive industries like utilities, consumer staples, healthcare, and telecoms. These can limit portfolio volatility and provide a stable return over time.

A top stock

United Utilities (LSE:UU.) is one such share that can help investors effectively manage risk.

The business provides water and wastewater services in the North West of England, a highly supervised industry that creates regulatory risks. But the essential role the FTSE 100 company provides means it enjoys predictable earnings across the economic cycle and the means to consistently pay large dividends.

Through a mix of capital gains and dividends, United Utilities has delivered an average annual return of roughly 7% since 2015. That’s higher than the 1% that Cash ISAs have provided over the period, and could be a great stock to consider for building long-term wealth.

The post Forget Cash ISAs! Here’s why I’m putting most of my money in UK shares appeared first on The Motley Fool UK.

But this isn’t necessarily the case with stocks. Some companies have really consistent records when it comes to distributing money to their owners in the form of dividends. And the amount tends to grow every year.

Let’s look at a couple from the FTSE 100 to consider buying, both of which are trading on low valuations.

Temporarily hated

To be fair, global distributor Bunzl (LSE: BNZL) isn’t having a very good 2025. The share price has dived over 30% following a number of announcements that didn’t sit well with investors.

Back in April, the £7.4bn cap cut its full-year guidance and suspended a share buyback due to weak trading across its North American businesses. Operating margins were also expected to fall — not exactly ideal given they’re already pretty low in the sector.

However, this sticky period is a bit of a rarity. Over the years, the stock has gradually ascended in value as investors have warmed to its boring-but-essential line of work.

Dividends look safe

But we’re looking at passive income, aren’t we? Well, the share price fall has at least succeeded in pushing up the dividend yield. As I type, Bunzl shares are forecast to offer 3.4%.

No second stream of cash is ever guaranteed, of course. There could be more bumps in the road ahead as a result of Donald Trump’s tariffs.

Considering just how essential the things Bunzl distributes are (think coffee cups and cleaning products), I’m inclined to think the risk of a dividend cut is low. The FY25 payout is set to be covered over twice by profit. That makes it a lot more secure when compared to other companies with higher yields in the FTSE 100. It’s also decent compensation for holders while they await a recovery.

The cherry on the cake is the price-to-earnings (P/E) ratio of 13. This is low compared to what buyers have paid in the past.

Dependable income stock

Another business with a good record of growing dividends is water firm United Utilities (LSE: UU). The yield currently sits at an above-average 4.6%.

This is never going to be the sort of company to get the pulse racing. But recent progress bodes well. The £8bn cap — whose works span the North West of England — reported a 10% rise in year-on-year revenue to £2.15bn. Underlying pre-tax profit also surged by nearly 54% to £338.6m.

Regulatory tailwinds

This is not say it’s always been plain-sailing for holders. Despite the predictable nature of the business, its share price can be rather volatile.

The long-term performance isn’t anything to write home about either. In the last five years, the stock has climbed just over 20%. Even with dividends added on, this pales in comparison to the sort of gains achieved by other top-tier members. The index itself is up just over 51% in value over the same period!

Still, a P/E of under 12 suggests there’s value here, especially if investor confidence improves on the back of favourable developments such as the establishment of a single water regulator in England and Wales.

The post 2 FTSE 100 dividend growth stocks to consider for long-term second income appeared first on The Motley Fool UK.

While the FTSE 100 is down nearly 11.5% over the last week, two quiet achievers have managed to climb almost 5% each. 

In turbulent times like these, that kind of resilience grabs my attention. Especially when it’s from a sector I’ve ignored for years: water utilities.

Utilities have long been seen as classic defensive stocks. People don’t suddenly stop turning on the taps or boiling the kettle during a downturn. Their earnings are typically regulated too, which can help smooth the financial ride.

Of course, they’re not perfect. Utilities tend to lag in boom times and often carry high levels of debt. 

In today’s world of elevated interest rates, that means bigger borrowing costs. It also makes their dividends look less appealing compared to the return on cash and bonds, which carry little or no capital risk.

Even so, these two water giants have defied the market panic

United Utilities is this week’s biggest winner

United Utilities (LSE: UU) is the best performer on the FTSE 100 over the past week, the shares jumping 4.9%. Over 12 months, it’s barely moved (up less than 1%), but over five years, it’s climbed 25%.

That’s before factoring in its dividend, which currently yields a tempting 4.88%. Last year, it hiked the dividend by 9.4% to 49.78p per share.

There are higher yields out there, but few come with the same level of perceived stability. That said, United Utilities isn’t cheap. At 33 times earnings, the stock trades on a premium valuation.

The group is also committed to a £13bn investment programme over the next five years, which will go towards the biggest infrastructure upgrade in more than a century. And it’s putting aside £525m to help low income households pay their bills. Net debt is already high at around £9bn, bigger than its £7bn market cap.

Despite that, the board expects to increase dividends in line with inflation, while the balance sheet still looks sturdy, with £2.6bn in liquidity.

Personally, I’m more interested in stocks that have dropped but for more cautious investors, this kind of performance may be worth considering.

The Severn Trent share price is on the up

Severn Trent (LSE: SVT) has also made a splash this week, with its share price up 4.77%. It’s gained 5% over the year, and 22% over five years (again, before dividends). That’s also a pretty solid total return from an easily overlooked FTSE stock.

Like United Utilities, it’s not cheap, with a price-to-earnings ratio of around 33. It has net debt of around £7bn against a £7.7bn market cap.

The group tripled half-year profits to £192m in November but came under fire for missing drinking water standards, while paying CEO Liv Garfield £3.2m despite a £2m fine for a sewage spill in the River Trent. Last year, it hiked the dividend more than 9% to 116.84p per share. The current trailing yield is a solid 4.57%.

If markets recover quickly, these steady climbers could fall out of favour. But if interest rates drop or market volatility continues, these are worth considering for investors who prize a good night’s sleep.

The post Up 5% in the last crazy week! Are these 2 income stocks the ultimate FTSE defensive plays? appeared first on The Motley Fool UK.

Investors should therefore keep a close eye on economic developments. But in the meantime, here are two FTSE shares I think may be worth considering.

Aviva

UK shares that have little-to-no US exposure like Aviva (LSE:AV.) may be attractive stocks to consider as transatlantic trade wars heat up. Its regional footprint covers just Britain, Ireland and Canada.

Yet this isn’t the only reason I believe the financial services giant merits serious attention. Thanks to its huge general insurance division, Aviva derives a large chunk of profits from defensive operations that are largely unaffected by economic conditions.

In the UK and Ireland, the firm has 7m customers using its motor, home, pet and travel insurance. Spending on policies like these tends to remain resilient at all points of the economic cycle. It’s a legal requirement for drivers to have adequate insurance as well.

Through its upcoming acquisition of FTSE 250 operator Direct Line, Aviva’s exposure to this highly resilient market will grow further too.

These two factors alone don’t provide Aviva’s profits column with complete protection however. It’s important to note that it sprawling life insurance, wealth and retirement divisions are highly cyclical and prone to weakening when consumers feel the pinch.

This naturally casts a shadow over what future dividends could be. But I think the firm’s large defensive businesses, allied with its cash-rich balance sheet, leave it in good shape to continue paying market-beating dividends.

Aviva’s Solvency II capital ratio was 203% as of December, more than double regulatory requirements. For 2025, the business is tipped to raise the annual dividend to 37.85p per share, resulting in a 7.6% dividend yield.

United Utilities

Some believe that water companies like United Utilities (LSE:UU.) are among the greatest dividend shares to buy during tough times. Access to running water is one of life’s essential needs and the same can be said for electricity and gas.

But a higher proportion of energy consumption is reliant on cyclical sectors like manufacturing and construction compared with that for water. So water suppliers may be a safer pick as economic uncertainty grows.

Resilient consumer demand has given United Utilities the strength to pay a growing, market-beating dividend over time. The business — which provides water and wastewater services in the North West of England — is tipped to raise the reward to 53.14p per share this financial year (to March 2026).

Consequently, the FTSE company carries a robust 5.2% dividend yield.

Despite the predictability of the market it operates in, there are some important threats investors need to consider with United Utilities shares. Worsening tariffs could fuel inflation that eat into United Utilities’ asset values and push up borrowing costs. It’s also critical to remember the firm operates in a highly regulated industry in which Ofwat dictates pricing and can issue hefty fines for operational issues.

But in the current climate, I still feel that both United Utilities and Aviva shares are worth a close look.

The post 2 strong FTSE 100 dividend shares to consider as recessionary risks increase appeared first on The Motley Fool UK.

Business still flowing

The first one was United Utilities Group (LSE:UU), which was the best-performing FTSE 100 name last week. It gained almost 5%, meaning the stock is up 1% over the last year.

There was no major business-specific news that came out, but rather, the rally speaks to where investors were reallocating their money. During uncertain times, utilities tend to outperform other sectors due to their defensive operations. For example, United Utilities primarily provides water and wastewater services in the North West of England. It has a proven business model of charging for these services within a fair regulatory framework.

So even if the tariffs damage the UK economy, people will still need water services. This should mean that the company’s revenue is unhindered by last week’s announcements. This can’t be said for all firms!

With a dividend yield of 4.79% and a track record of over a decade of continuous payments, the appeal of owning the stock for income during a volatile period also can’t be underestimated.

However, sewage leaks can cause reputational damage and fines. The company has recently been accused of illegally dumping waste in Lake Windermere. This situation needs to be monitored closely.

Captain of stormy seas

Admiral Group (LSE:ADM) rose by 2.5% last week and is now up 10% over the previous year. The insurance company primarily focuses on car and household protection, selling insurance straight to the public. It makes money from the premiums paid and other ancillary services.

Even though the group does have some small exposure to the US, it was reported last month that the company is looking to sell the US operations. Therefore, even though it might get slightly caught in the crosshairs of the evolving trade war, the vast majority of business is done in the UK.

Aside from that positive element, Admiral slots in again as a defensive stock. In my view, this was the main reason for the share price increasing last week. Insurance is a product that we all need, especially car insurance. Even if times get tough, I have to insure my vehicle. The impact on Admiral of any pending economic storm should be limited. This makes it appealing for investors at the moment.

Despite all the good points, investors need to be aware that Admiral is exposed to unexpected spikes in claims. Should we have a black swan event, extreme weather or other similar things, it could have to take a hit with payouts.

I think both stocks are worthy of consideration for an investor looking to find some defensive ideas to shelter from the market fall.

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I’ve a spread of dividend shares, including Lloyds Banking Group, Legal & General Group and M&G. Clearly, I’m too heavily concentrated in the financial sector and need to spread my wings. So I decided to size up a couple of utilities instead.

United Utilities Group (LSE: UU) jumped out at me. As a regulated water utility company, United Utilities has predictable earnings due to consistent demand for water services. This should help fund a stable yet growing stream of second income.

Should I buy?

The stock currently yields a thirst-quenching 4.87%. Last Wednesday (29 January), the board announced plans to increase dividend payments in line with inflation over the next five years. That would give me a hedge against rising living costs. Any share price growth would be on top.

Regulator Ofwat approved the dividend hike but this actually triggered a credit rating downgrade by Moody’s to Baa2/Stable. This could raise borrowing costs.

That’s a worry given that United Utilities is investing £13bn between now and 2030 to clean rivers and upgrade infrastructure, in what CEO Louise Beardmore called “the largest investment in water and wastewater infrastructure in over 100 years”.

Privatised utilities are controversial right now. United Utilities has been attacked by clean water campaigners over sewage discharges into Windermere in the Lake District. It’s also drawn fire for hiking household bills 32% over five years starting April.

With the United Utilities share price down 4% over one year and flat over five, I can’t work up much enthusiasm. Especially given its price-to-earnings (P/E) valuation of more than 30. That’s double the FTSE 100 average. Time to deploy my bargepole.

It’s a while since I looked at renewables-focused power giant SSE (LSE: SSE). So is this more tempting? I remember when the stock routinely paid income of around 6% so was surprised to see the trailing yield down to 3.7%.

The SSE dividend was cut last year

Then I remembered SSE rebased its full-year dividend per share for 2023/24 to 60p last May. That was down from 96.7p the previous year, a 38% drop.

The board’s planning generous targeted increases of between 5% and 10% a year to 2026/27. It says this “aligns future dividends with SSE’s ambitious growth profile”, but I’m not sure that aligns with my own income needs. The SSE share price is down 3% over the last year. Over five, it’s up a modest 8%, plus dividends.

The rebasing was designed to keep shareholder payouts affordable while SSE pumps money into infrastructure. Its transmissions business now plans to spend almost £32bn by 2031 to connect offshore wind farms to the power grid.

On 20 January, Citi warned that SSE also needs to address its long-term funding structure and warned “the lack of immediate action given the pending change of management and ongoing RIIO ET3 review is unlikely to delivery this clarity”.

SSE doesn’t grab me either. Even though its shares look much better value than United Utilities, with a P/E of just over 10 times. Luckily, I’ve still got my bargepole handy.

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Noting companies that could struggle

If inflation does move higher, investors will have to readjust their expectations for fewer interest rate cuts. The base rate will likely stay higher for longer. This means that companies that have a lot of debt or that rely on high credit spending from consumers will struggle.

Even though I don’t hold a lot of these type of stocks in my ISA, I can consider protecting myself by adding in some shares that have the opposite characteristics — low debt levels and no real reliance on credit spending by customers. This should help to offset any negative impact to my portfolio.

Hunting for defensive stocks

If inflation keeps going, it has the potential to spook some investors. They might think that we’re going to return to a high-inflation environment like during the period following the pandemic. In reality, we’re in a much different economic situation than back then. But emotions can cause some to sell and act with short-term vision.

To protect myself, I can consider buying defensive stocks. For example, the United Utilities Group (LSE:UU) is a share that I’d buy next year if inflation keeps rising. The water provider and wastewater service operator makes money by providing these essential services to consumers and businesses.

It can be referred to as a defensive stock because the provision of utilities is a necessity for most clients. So even during periods of high inflation or low economic growth, people are likely to still pay for United Utilities services. This should help to protect the share price from any massive drops, although it’s not guaranteed. Over the past year, the share price is down by a modest 1%.

Let’s also not forget that the dividend yield is a generous 4.74%. So the income potential is good, with a track record of constant dividends being paid for over a decade.

However, one risk is debt levels. The latest half-year results showed net debt rising by 6% versus the same period a year ago to over £9bn. This isn’t great and could put unnecessary pressure on the business.

Aiming for a real return

Finally, I can make use of dividend stocks to try and generate a real return despite higher inflation. For example, if I buy a stock with a yield of 5% and inflation is currently at 2.6%, my real yield is 2.4%. Of course, this isn’t an exact science. Inflation changes over time, as can the dividend per share payment from a business.

Yet even with these uncertainties, income shares can help to protect my ISA value, as it will be generating some form of return that prevents it being eroded by inflation.

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Despite the early dip, the 2023 full-year earnings report revealed some decent progress and growth on certain metrics. Revenue is up 8.3% to £1.95bn compared to £1.8bn last year, leading to a dividend increase of 9.4%.

On the announcement, CEO Louise Beardmore said the company has met or exceeded around 80% of its regulatory targets. “Our finances are robust with one of the lowest levels of gearing in the sector“, she said.

So what’s that smell?

For those living in the Windermere area of the Lake District, some may be asking why the early summer air smells a bit miffy. That’s the lingering stench of sewage that spilt into the lake following a fault at the Bownes-on-Windermere pumping station in February.

The spill was allegedly caused by an unexpected fault in a telecoms network that affected a backup system.

In this morning’s results, United Utilities announced £400m worth of investment to avoid future spills. However, it may still face legal action from the Environment Agency. The spill and subsequent investment were partly responsible for a 51% fall in pre-tax profit, down from £256m to £170m this year.

Strong dividend payer

Despite the controversy, United has been delivering acceptable returns for shareholders. In the past year, it has returned 4.6%. That’s a fair bit higher than the overall UK Water Utilities market which fell 3.9%. In the past five years, the share price is up 41% with consistent dividends steadily increasing for 10 years.

Independent analysts forecast the company’s earnings to grow at a rate of 38% going forward, predicting a future return on equity (ROE) of 19.8%. By comparison, fellow water works company Severn Trent‘s earnings are only expected to grow at a rate of 24.6%. It’s also had a far worse year than United, with the share price down 10% since last May.

Overall, the UK water utilities industry appears to be struggling at the moment but United may be doing better than others. However, is it enough to save its strained balance sheet?

The debt monster

United Utilities has £9.1bn in debt shored up by only £2.17bn in equity and short-term cash of £828m. That leaves it with a very high debt-to-equity ratio of 417% and only 1.8 times interest coverage. I would say this makes it a risky investment, as there appears to be a high possibility of financial troubles if things don’t improve soon.

The situation also increases the likelihood of dividends being cut, reducing one of the stock’s key value propositions.

There does seem to be some improvements occurring at United but any further environmental accidents could spell catastrophe for the company. It doesn’t appear to have the capital to keep patching up incidents with the promise of investment, so it’ll need to operate more carefully. While the dividend is attractive, I believe the risks posed by the company’s debt situation overshadow it.

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