2020 has been quite the rough year for investors, and particularly so for income investors. With dividend cuts seen left, right and centre, passive income is harder to come by. Moreover, the dividends that are around are far less dependable than earlier. So what should FTSE 100 income investors do?
I think it’s a good idea to consider utility stocks. Utilities’ demand is least affected during economic downturns or even lockdowns. People need electricity, water supply, and sewerage services irrespective of whether they are the top-1% of the economic strata or just about making ends meet.
Following from this, FTSE 100 utility providers are guaranteed a base level of demand for their services. Each one of them also pays dividends. And unless they are facing company specific issues, I reckon dividend continuity is highly likely for them.
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5%+ dividend yields
National Grid and SSE have the biggest dividends among the utilities, of 5.9% and 5.4% respectively. I’ve had some recent reservations about NG because there was a lot of negative news flow on the company, including talks of its break up. Its profits have also been recently dented because of higher Covid-19 costs. At the same time, I think its dividends aren’t going away anytime soon, making it a FTSE 100 stock to consider.
Like NG, SSE’s also an electricity and gas provider with a big dividend yield. Its long-term future looks good, with plans for tripling its renewable energy production by 2030. Its dividends have been increasing in the past years as well. Yet, I’m wary of its uneven financials, which makes dividend continuity less predictable.
4%-5% dividend yields
If the highest yielders don’t look appealing enough holistically, I’d consider other utilities with 4%-5% dividend yields. One of them is Severn Trent, the water and sewerage services provider, which I wrote about in the context of dividends a month ago. Since then, its share price has fallen a bit.
Its results, released in late November, were somewhat softer but still in line with the company’s expectations. I think its share price correction is due to the market’s shift away from safer stocks to riskier ones. In my view, it’s a great time to buy the stock at a relatively low price.
Another water and wastewater services provider, United Utilities, has a dividend yield of 4.6%. It has recently forecast a hit to its revenue this year because of the pandemic, and a lower price set by the regulator. However, the utility’s dividends aren’t about to vanish into thin air. Quite the contrary. Its dividend policy up to 2025 is to increase them in line with the inflation rate. I think this would make for a great buy now.
Sub-4%
Last is the plumbing and heating products’ distributor, Ferguson, with a 3.1% yield. Strictly speaking, it’s not a utility but a support services provider to utilities. Still, it’s closely related. It cut its dividends but has brought them back and even reported improvement in its financials recently. I’d consider buying it too.
