As such, it may be possible for an investor to generate a portfolio yield of over 5% or even 6% by investing in a diverse range of large-cap shares.

With that in mind, here are two FTSE 100 stocks which yield over 5% and that could offer impressive total returns in the long run.

United Utilities

Water services company United Utilities (LSE: UU) has a dividend yield of around 5.3% at the present time. It has a long track record of increasing shareholder payouts, with its business model having proved popular among income-seeking investors in the past as a result of its defensive characteristics.

Looking ahead, the stock could experience greater volatility than in the past. There are threats facing its future from political and regulatory change that could cause investors to adopt an increasingly cautious stance towards it.

However, with a dividend yield that is around 80 basis points higher than that of the FTSE 100, it appears as though investors may have priced in the potential risks which it faces. As such, with it having less positive correlation to the wider economy than many of its index peers at a time when the UK and world economies face uncertain futures, United Utilities could be a worthwhile income investing stock for the long term.

ITV

While United Utilities is generally viewed as a defensive stock by many investors, FTSE 100 index peer ITV (LSE: ITV) is a cyclical business. It is highly dependent on the performance of the wider economy, with demand for TV advertising being impacted by business and consumer sentiment levels.

As such, the company has struggled to generate positive net profit growth in the last few years, with its results also being impacted by the rising popularity of digital marketing across a wide range of businesses. This situation could persist over the coming months, with the UK’s economic outlook seemingly highly dependent on the outcome of Brexit.

Recent updates from ITV have shown that the company continues to see rising viewing figures, while the planned launch of BritBox (which is a joint venture video streaming service with the BBC) could help to align the business with changing consumer tastes.

Since the stock trades on a price-to-earnings (P/E) ratio of 7.1, it seems to offer a wide margin of safety. Its dividend yield of 7.5% is covered 1.9 times by profit, which suggests it is sustainable even if the company is unable to deliver strong earnings growth over the medium term.

Due to its cyclicality, ITV lacks the resilience of some of its index peers. But with what seems to be a sound strategy and a low valuation, its return prospects could be highly enticing.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.

I have no better idea than you as to what’s going to happen next, be it a no-deal Brexit, some kind of revised deal, a second referendum and/or another general election. 

Nevertheless, I do think that the once-laughed-at scenario of a Labour government getting back into power with Jeremy Corbyn at the helm is certainly more plausible than it used to be.

In Labour’s sights

Very generally speaking, a new Labour government might not be great news for those who have wealth or are in the process of trying to build it. It’s particularly problematic for those who invest in the stock market.

Back in 2017, the party made a pledge to nationalise rail companies, mail delivery, energy supply networks, and water businesses. You can expect a similar pledge if the country were asked to return to the polls later this year or next.

This clearly has implications for a few FTSE 100 stocks, including United Utilities and Severn Trent — the two largest listed water companies with market capitalisations of £5.3bn and £4.5bn respectively.

They’re also big favourites among income investors and understandably so.

Both stocks are forecast to yield 5.2% in 2019 based on their current share prices. That’s clearly far superior to the derisory rates of interest on offer from a typical Cash ISA, although it’s worth pointing out that cash returns from both (and particularly United) haven’t exactly rocketed over the years.

However, after years of being regarded as a ‘safe’ place to park your cash and generate substantial, reliable dividend streams in the process, these firms could now be at risk of returning to public ownership.

That said, there will be many out there who believe that a Jeremy Corbyn-led government, while not impossible to envisage, is still very unlikely to happen.

As Sir John Curtice — Professor of Politics at Strathclyde University — commented yesterday, those already in power “often perform badly in European elections, as voters take the opportunity to express their disappointment with its performance without the risk that their vote might put the opposition into government“. The fact that Labour didn’t do all that much better is also telling.

Nevertheless, with senior Conservative MPs likely to be at each others’ throats until they elect a new leader in July, I can’t see the party’s popularity increasing anytime soon. 

Not worth the risk

Severn and United’s shares had identical valuations of 14 times forecast earnings before markets opened this morning. 

That looks expensive, especially as they face an uncertain future (although I acknowledge this could be applied to the vast majority of UK-focused businesses right now). 

Due to needing to keep their infrastructure running smoothly, both also have not-insignificant amounts of debt and are exposed to ongoing regulatory pressures.

Rather than attempt to predict the outcome of political events, I suggest those holding (and determined to continue doing so) should make checking they are sufficiently diversified elsewhere a priority.

It’s also worth bearing in mind that Shadow Chancellor John McDonnell has already stated that Labour would only pay a third of the water industry’s estimated market value to investors when it is nationalised.

Personally, I’ll continue to avoid both stocks for the foreseeable future.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

By contrast, the FTSE 100 has a dividend yield of around 4%. However, it is possible to generate a higher yield which may rise with inflation over the long run. With that in mind, here are two FTSE 100 stocks that offer 5%+ dividend yields, as well as capital growth potential.

United Utilities

Despite the political uncertainty facing the UK at the present time, the United Utilities (LSE: UU) share price has risen sharply in recent months. In fact, it is up by 13% since the turn of the year, with investors becoming increasingly optimistic about a variety of companies that are focused on the UK.

Even though it has risen sharply of late, United Utilities still has a dividend yield of just over 5%. It has a solid track record of dividend growth, and could increase its future payments by at least as much as inflation.

Although there are risks from a potential nationalisation of the wider water services sector should there be a change in government, United Utilities seems to offer a wide margin of safety at the present time. Its price-to-earnings (P/E) ratio of 14.7 is relatively modest compared to its historic levels, and could indicate that there is a value investing opportunity on offer over the long term.

Landsec

The commercial property sector has faced a difficult period over the last couple of years, with shares in stocks such as Landsec (LSE: LAND) coming under pressure. Even though it has gained 16% since the start of 2019, it still trades on a price-to-book (P/B) ratio of 0.7. This suggests that it offers excellent value for money, since it could rise by 50% and still only trade at net asset value.

Clearly, there is scope for a fall in commercial property prices in London and across the UK. Brexit risks may not feel as pressing as they did a few weeks ago. However, there remains a deadline for later this year when talks need to be finalised, and this may mean that investment in the property sector remains at a low level throughout 2019.

With Landsec having a dividend yield of 5.3%, it could deliver an impressive total return even over the short run. Since the commercial property industry moves in cycles, now could be a good time to buy into it while it trades at a low ebb. While potentially risky depending on how the UK economy performs, the company appears to have a solid asset base, a sound strategy and a wide margin of safety which together may drive its share price higher.

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Peter Stephens owns shares of Landsec. The Motley Fool UK has recommended Landsec. 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’s a FTSE 100 utility share which, while unpopular, could perform well over the long run. It seems to offer a mix of income and value investing potential.

Defensive appeal

United Utilities (LSE: UU) has recorded a share price fall of almost 20% in the last year. There are concerns among investors regarding the regulatory risk that the water company faces. It’s set to reduce average bills by 10.5% in real terms between 2020 and 2025. While this is positive news for the company’s customers, it could put the financial prospects of the business under a degree of pressure. This has called the affordability of its dividend into question.

With United Utilities now yielding around 5.7%, it appears as though investors may have factored in potential slow dividend growth over the long run. Its current income return is high by its own historical standards, and indicates that it could offer a margin of safety. Further evidence of this can be seen in the stock’s valuation. It currently has a forward price-to-earnings (P/E) ratio of under 14, which indicates that its shares offer good value for money.

Of course, the company could have defensive appeal over the medium term. The current FTSE 100 bull market will not last in perpetuity, and defensive shares with lower correlation to the wider economy could gain in popularity. United Utilities could therefore become an increasingly appealing income share to own over the coming years.

Improving outlook

Also offering income potential within the utility industry is Fulcrum Utility Services (LSE: FCRM). The independent multi-utility infrastructure and services provider released a trading update on Wednesday which highlighted its strong performance in the six months to 30 September. It has seen an increase in its order book of 5%, which now stands at £44.1m.

Two significant contracts were built out during the period. The first is a large gas pipeline to a food manufacturing plant, while the second is a large high voltage electricity infrastructure project for a battery storage site.

The company continues to grow its utility asset estate and the associated annuity revenue streams. The integration of Dunamis is also progressing well, with increasing numbers of collaborative gas and electricity opportunities being generated.

Looking ahead, Fulcrum is expected to post earnings growth of 8% in the current year. This has the potential to boost its dividend payments, with it currently having a dividend yield of 3.7%. Since dividends are covered 1.9 times by profit, they seem to offer scope to rise at a brisk pace. As such, the stock could be a worthwhile income investment for the long term.

The post A cheap FTSE 100 dividend share that I’d buy and hold for 10 years appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of United Utilities. The Motley Fool UK has no position in any of the shares mentioned. 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.

Why?

SSE blamed the slide in profits mainly on short-term factors, including the rise in wholesale gas prices. The weather, which was unusually dry, still and warm, not only reduced household use of gas and electricity but also lowered the amount of electricity generated by renewables. Meanwhile, the company only raised prices once this year, unlike many of its competitors.

The issues in the first half of the year seem to be only short-term in nature, but this week’s profit warning shows that volatility in the overall performance of the wholesale businesses may be here to stay. What’s more, some headwinds aren’t going to ease any time soon, with Ofgem’s proposed price cap set to add to retail pricing pressures and significantly lower adjusted operating profit for the retail business in the full year.

Dividends untouched

That said, the company remains committed to the dividend policy set out earlier this year, which underscores management’s confidence in the underlying performance of SSE’s businesses. The company expects to raise this year’s dividend by 3% to 97.5p, representing dividend growth which is broadly in line with expectations for RPI inflation. At its current share price, this would give its shares a prospective yield of nearly 9%.

And following the planned spin-off of its retail supply business to shareholders (and merger with Innogy’s Npower), SSE plans to re-base its dividend payout to 80p per share in 2019/20, before returning to dividend growth which will keep pace with RPI inflation in the three following years to March 2023.

Water companies

It’s not just the shares of energy suppliers that have been hit by pricing pressures. Water companies, such as United Utilities (LSE: UU), are set to face a tougher regulatory regime, with the regulator Ofwat signalling a much stricter price control regime for the upcoming regulatory review.

In its submission to the regulator, United Utilities has pledged to cut average bills by 10.5% in real terms between 2020 and 2025 — a reduction of roughly £45 per customer. It’s a significantly bigger cut to average bills than five years ago, and has sparked concerns about the safety of its dividends beyond 2020.

5.6% yield

The company, which has forecast dividend cover of around 80% next year, will likely find it difficult to afford its current progressive dividend policy, especially given its high debt pile. Net debt (including derivatives) was £6.87bn as at 31 March 2018, up from £6.58bn last year.

Shares in United Utilities have dipped by more than 20% over the past year, which has helped push up its dividend yield to 5.6%. This is significantly higher than its five-year average dividend yield of 4.2%, and could trend even higher with RPI-linked dividend growth already pledged for the next two years.

The post Tempted by the SSE share price? Here’s what you need to know appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

All else being equal, I prefer to invest in companies that treat their customers well. I reckon there’s less risk of nasty surprises or future mishaps. And I think there’s a good chance operational excellence will also be reflected in a company’s financial management.

Buy this 5% yielder today?

Water utilities are starting to feel political heat about the way they manage their finances. A particular concern is the level of dividend payouts, relative to profits.

United isn’t the worst offender here, but last year’s dividend payout of £270m still accounted for 76% of the group’s reported profits of £354m. In contrast, the group only spent £149.5m on infrastructure renewal last year.

Is this a problem? If the profit margins allowed by the regulator are cut, then the group’s dividend could become hard to afford. But even allowing for this risk, I suspect United will remain a solid investment for income-only investors.

The firm’s shares have fallen by nearly 20% over the last year, lifting the forecast dividend yield to 5.3%. At this level I believe the shares could be worth buying for a long-term income.

A better choice for dividend growth?

Traditional utilities are feeling some political heat at the moment. If you’re unsure about investing directly but would still like some exposure to this income sector of the market, one alternative is FTSE 250 firm Telecoms Plus (LSE: TEP).

This business trades as Utility Warehouse and uses its bulk-buying power to sell bundled utilities to customers. The company expects to benefit from the energy price cap planned by regulator Ofgem later this year, as it will be able to pass on lower costs to its customers. This will make it easier for the firm to compete against smaller energy suppliers who are winning market share by offering cheap introductory deals.

A good set of figures

Today’s results suggest the business is still growing, even without this potential tailwind. Revenue rose by 7.1% to £792.9m during the year to 31 March, while adjusted pre-tax profit climbed 1.8% to £54.3m. The dividend will rise by 4.2% to 50p per share, giving a yield of about 4.7%.

Customer numbers rose by 0.5% to 610,739, but the number of services sold rose by 2.2% to 2.3m. Almost 20% of customers now take all five of the group’s services (landline, broadband, mobile, electricity and gas).

Is the dividend sustainable?

The firm’s balance sheet looks healthy enough. Year-end net debt of £11.2m isn’t significant given the group’s profits.

Like United Utilities, Telecoms Plus pays out very generous dividends. Last year’s dividend of 50p per share accounted for 90% of adjusted earnings of 55p per share. And my calculations suggest that this payout won’t quite be covered by free cash flow.

The big difference here is that Telecom Plus’s business doesn’t require much working capital or investment. If earnings remain stable, I’d expect the dividend to be sustainable.

Broker forecasts for 2018/19 put the stock on a P/E of 17 with a prospective yield of 5%. At this level, I think the shares are worth considering as an alternative to traditional utility stocks.

The post This overlooked FTSE 100 5% yielder could be a retirement buy appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Today I’m looking at two shares with dividend yields close to 5%. Both are trading below recent highs despite stable outlooks. Do these stocks deserve my dividend buy rating?

5.5% income for life?

Water company United Utilities (LSE: UU) currently offers a 5.5% dividend yield. The group’s payout has risen by an average of 4% each year since 2012, meaning that it’s stayed comfortably ahead of inflation.

However, shareholders who bought the stock early in 2017 will be painfully aware that the share price has fallen by more than 25% over the last year. I think it’s worth asking why this has happened.

In my view, the main reason why the shares have fallen is simply that they’d become too expensive. At last year’s 52-week high of 1,078p, United stock only offered a yield of 3.6%. That’s roughly equal to the FTSE 100 average. I don’t think that’s high enough, given the limited growth potential of this business.

However, there are a couple of other potential reasons why the stock has fallen.

The market may be concerned about the possibility that a Labour government might renationalise water utilities. A second reason could be that investors are worried about the risk of a dividend cut.

Do we need to worry?

With all of this potential bad news, you might think that water utility stocks are best avoided. However, I’m inclined to think that any risks facing the firm are now reflected in the price.

Analysts’ upgraded their profit forecasts for the current year following February’s trading update. The stock has since bounced off the low of 648p seen earlier this year.

United Utilities’ earnings are expected to rise by about 15% during the current financial year. This puts the stock on a forecast P/E of 14 with a prospective yield of 5.6%. In my view, this could be a good entry point for this business.

More upgraded forecasts

City analysts have upgraded their 2018 profit forecasts for miner Anglo American (LSE: AAL) every month since August last year.

The company’s progress during this period has been impressive. Management’s focus on cutting costs and boosting cash generation has delivered impressive results.

Net debt fell from $7.1bn to just $4.2bn last year, during which the group generated free cash flow of $4.9bn. At current levels, the stock trades on a price/free cash flow ratio of about 6.5, which is very low.

This successful turnaround has been reflected in profits, which rose by 48% last year. Shareholders were also rewarded with a return to dividend payments that yielded about 4.5%.

Too late to buy?

I don’t think it’s too late to buy. Although falling commodity prices are always a risk, the mining market is still at a fairly early stage of recovery. Companies have not yet started to add extra capacity and are instead focusing on maximising the returns from their existing mines.

In this climate I think Anglo American shares still offer good value. Trading on a forecast P/E of 8.6 with a prospective yield of 4.9%, I’d be happy to buy more for my portfolio.

The post 2 Footsie 5% dividend stocks I’d buy with £2,000 today appeared first on The Twelfth Magpie.

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Roland Head owns shares of Anglo American. The Motley Fool UK has no position in any of the shares mentioned. 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.

Longer-term fundamentals

One stock which I believe offers a sustainable high yield is Standard Life Aberdeen (LSE: SLA). Although the recently-merged asset manager is facing a number of challenges, most notably the loss of an asset management deal with its biggest client Lloyds Banking Group, the company’s longer-term fundamentals remain attractive.

In an industry which has been under pressure from the implementation of the European Union’s MiFID-II directive that caused many asset managers to absorb new research costs, Standard Life Aberdeen is moving with haste to deliver the cost synergies promised by its recent merger. Early indications show the integration is on track, and in a recent statement to shareholders, the company said that it now expects to deliver £250m in annualised cost savings, up from its previous estimate of £200m.

Fund outflows

Certainly, not everything is going to plan. With hindsight, it’s clear that investors have underestimated the disruption caused by the merger, especially the heavy fund redemptions from institutional investors in recent months. But I reckon the company is enduring some short-term pain to avoid long-term woes.

The asset management industry is undergoing some big changes as it faces stiff competition from passive managers and the company is trying to get ahead of the curve before it’s too late. The merger brings much needed scale and financial clout as it sets out to meet the future investment needs of its clients — via the launch of new ‘next generation’ investment solutions and the pass-through of lower costs to its clients.

However, not everyone is convinced as valuations are undemanding, with the shares trading at 12.6 times forecast earnings this year. This means that on top of its attractive 5.8% yield, there’s also serious upside potential from a re-rating of its shares.

Reliable dividends

United Utilities (LSE: UU), which manages the regulated water and waste water network in North West England, is another FTSE 100 stock which seems set to deliver reliable dividends.

In a recent trading update ahead of its full-year results on 24 May, the company announced it was trading in line with earlier expectations and that it was on course to report growth in both revenue and underlying operating profit. This marks another strong year with the company maintaining its upbeat guidance on its performance against the regulator Ofwat’s Outcome Delivery Incentives.

I know there’s a lot of uncertainty surrounding future regulation, with Ofwat signalling a much tougher price control regime for the upcoming regulatory review, but I reckon shares in United Utilities have already priced-in much of the risk. Although the tougher pricing regime will probably hurt returns going forward, I reckon any changes will likely be modest and incremental in order to protect investment in the sector.

Unitied Utilities has a strong track record of steadily growing its dividends, having raised its dividend payout from 30p in 2010 to 38.87p, representing a compound annual growth rate (CAGR) of 3.8%. The shares currently yield 5.3%, with dividend growth forecast to grow by at least the rate of RPI inflation annually through to 2020.

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Jack Tang has a position in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking 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.

To say that the performance of shares in water company United Utilities (LSE: UU) has left a lot to be desired over the last year is putting it mildly.

Priced at the £10 mark exactly one year ago, the shares were down 35% before this morning’s pre-close trading statement as a result of concerns over increased regulation and rising inflation.

Based on its contents — and the market’s fairly uninspired reaction — I’m not sure the stock will be bouncing back any time soon.     

United we fall

According to the £4.5bn cap, current trading is in line with expectations. Thanks to higher charges permitted by Ofwat, group revenue is predicted to come in “slightly higher” than in the previous financial year with underlying operating profit also expected to be “moderately higher than 2016/17“. So far, so adequate.

Unfortunately, higher retail price inflation has continued to increase the company’s index-linked debt (which it has quite a bit of compared to industry peers), which in turn hits earnings. It now expects the underlying net finance expense to be “around £40m higher” than in the previous year. There will also be a “small increase” in net debt as a result of ongoing investment in its asset base. 

Factor-in political concerns and the forthcoming review of water price controls by Ofwat and the investment case for United Utilities becomes still less attractive. That’s even if — as far as the latter is concerned — the company reflected that it is “confident” on being about to deliver against the water regulator’s key themes relating to “great customer service, affordable bills, innovation and resilience“.

Some may point to the near 6% yield and the resilient nature of utility companies, particularly when markets get choppy. While I don’t deny that the dividends on offer are tempting, it’s worth drawing attention to the fact that recent annual hikes have been disappointing at between 1% and 2%.

There’s also the valuation to consider. Trading at 15 times expected earnings, United Utilities still looks too expensive at the current time.

Special dividend

Given the choice, I’d far rather opt for £13bn cap plumbing and heating products and building materials distributor Ferguson (LSE: FERG), especially after today’s encouraging set of interim results.

At just over $10bn, ongoing revenue was 10.3% above that achieved over the same period in the 2016/17 financial year. Ongoing trading profit also rose a healthy 15% to $698m.

According to CEO John Martin, Ferguson (formerly known as Wolseley) delivered a “strong performance” over H1 thanks to “good growth and margin progression” in the US. Indeed, organic revenue from operations over the pond rose 8.7% in the reporting period. Improved growth was also seen in the Canadian market.

Despite stating that UK markets were “challenging” and that the company faces “progressively tougher” comparators in H2, Ferguson’s top man went on to reflect that the company was “confident” of achieving analyst expectations for full-year profits. 

Perhaps most positively for income investors, the Switzerland-based firm proposed a special dividend and share consolidation of around $1bn after confirming that it expects to complete the sale of building materials firm Stark Group at the end of the month. This was in addition to an encouraging 10% hike to the interim payout.

These facts, combined with improving returns on the capital it invests, falling debt and far greater geographical diversification, make Ferguson the clear winner for me.

The post Why I’d buy this FTSE 100 dividend hero over United Utilities Group plc appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Of course, with the FTSE 100 trading at well over 7,000 points, there may be a limited choice on offer for investors seeking good value income shares. Margins of safety may be less enticing than they once were, but with a potent mix of dividend growth and high yields, these two shares could be worthy of a closer look right now.

Turnaround prospects

Reporting on Tuesday was power station operator Drax (LSE: DRX). The company’s performance in 2017 showed a marked improvement versus the prior year, with EBITDA (earnings before interest, tax, depreciation and amortisation) rising by 64% to £229m. All parts of the business delivered growth, which is encouraging for its future potential.

The company continues to deliver on its strategy and remains on target to reach more than £425m in EBITDA by 2025. Its energy supply growth has accelerated due to the acquisition of Opus Energy. It has also increased biomass self-supply through acquisitions and the commissioning of a third biomass pellet plant.

With the UK undergoing an energy revolution, the prospects for Drax appear to be bright. It looks set to deliver significant amounts of profitability in the coming years which could be used to pay its investors a higher dividend. And with the company yielding 5.7% in the current year, it looks set to offer a significant income stream for its shareholders.

Bargain valuation

Also offering the prospect of impressive dividend performance is water company United Utilities (LSE: UU). The company’s shares have been relatively unpopular among investors in recent months. Political risk remains high, while regulatory concerns have also contributed to a 30% fall in the stock’s price in the last year.

The fall in valuation means it now has a dividend yield of over 6%. This is historically exceptionally high and suggests that there’s a wide margin of safety on offer. Furthermore, with dividend growth set to remain ahead of inflation over the medium term, the stock could prove to be valuable for investors who are concerned about the potential impact of higher inflation on their income.

With United Utilities having an uncertain future, now could be a worthwhile buying opportunity for long term investors. Certainly there are risks associated with the stock and its share price performance could suffer yet further if investors remain focused on cyclicals rather than defensive stocks. But with such a high dividend yield, these risks appear to have been factored in by investors. As such, its risk/reward ratio appears to be highly favourable at the present time.

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Peter Stephens owns shares in United Utilities. The Motley Fool UK has no position in any of the shares mentioned. 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.