The FTSE 100‘s energy and water companies are amongst the most reliable long-term investments there are, and it’s largely down to their dividends.
In fact, a ten-year investment in National Grid (LSE: NG), which has been providing investors with yields of 5% and more, would have more than trebled in value by today if you had reinvested the cash in new shares each year.
There was a bit of a scare leading up to the election with fears that Labour’s promised energy price caps would damage shareholders’ returns, but obviously that has evaporated now — and it would only have been a short term thing anyway. Still, the election result has given utilities shares a bit of a boost, with optimism rising ahead of full-year results due this week.
Should you invest £1,000 in National Grid right now?
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Dividend rises
We’ll start with SSE (LSE: SSE), which is due to report on Wednesday. SVT shares are up 13% over the past 12 months to 1,658p, knocking the expected dividend yield down to a shade under 4% — back in 2010 we had a 6% yield, but 4% is still pretty decent. In fact, at Q3 time reported in January, SSE confirmed that it expects its total dividend to “at least be equal to RPI inflation“, with the same target of beating inflation for subsequent years.
For me, a progressive dividend is a more important thing to look for than a current high yield.
We should get something similar from National Grid too, due to report on Thursday. National Grid shares have been flat over the year, standing at 891p today, but it remains my favourite of the utilities. We’re expecting inflation-busting increases for at least this year and the next two, taking the yield to 5.1% by 2017 at today’s share price — and though there’s a 16% EPS fall on the cards, the cash payout will still be adequately covered.
Beating inflation
Thursday will bring results from United Utilities (LSE: UU), too, and we’re looking at dividend yields of 3.8% forecast for this year and rising to 4% by 2017 — once again with a progressive policy. The company expects underlying operating profit to rise modestly, which should lead to a decent increase in EPS, although reinvestment, price controls and debts are expected to drop earnings back again next year. The dividend cash should be safe, though, again with adequate cover. At 996p, United shares are up 17% in a year.
Finally, Severn Trent (LSE: SVT) will report on Friday, and we should see another progressive dividend yield of about 4% with earnings pretty much flat between 2014 and 2017. The share price? Up 13% to 2,172p. Forecasts have been trending upwards for Severn Trent in recent months, but analysts are cautious with only a modest Buy consensus out there.
Which is best?
In fact, the City is decidedly cagey about all four of these companies, but maybe that will change as post-election recommendations start to come through — I’m certainly more bullish about these stocks as long-term investments, and I rate each one as a Buy.
