Savings slowly being eroded

Truth is, no-one really knows what’s going to happen post-Brexit, as no-one really knows what’s going to happen to the oil price, or even sales of the new iPhone 8 for that matter. Forecasting, or even guessing and hoping is the best we can do in an age of unpredictability and uncertainty.

So other than letting the value of our savings slowly erode in our bank accounts, what can investors do to protect themselves from the unknowns of a post-Brexit Britain. Well, I have an idea. Why not invest your hard-earned cash in a business that churns out vast amounts of cash, day in, day out, without being affected by a constantly changing political and economic landscape?

Brexit-proof commodity

If ever there was a Brexit-proof commodity then it would be water. We all need it and consume it in vast quantities whatever our financial circumstances might be. There can’t be very many households left in the UK that don’t contribute in some way to the substantial revenues of the big regional water companies. Yep, we’re all customers, whether we like it or not.

Pennon Group (LSE: PNN) is one of the few remaining London-listed water companies that investors can stake a claim in these days. The rest have been swallowed up by a whole host of investment funds and foreign consortia. The Exeter-based group owns South West Water, which provides water and wastewater services to Devon, Cornwall and parts of Dorset and Somerset, as well as leading waste treatment and disposal business Viridor.

Virtual monopoly

I like the fact that Pennon operates as a virtual monopoly within its own geographical area, and is also a leader in delivering energy from waste though the Viridor subsidiary. The FTSE 250 group also has a long-established policy to grow the dividend by 4% above inflation each year at least until 2020.

In fact, earlier this year management hiked the final dividend payout by 7.6% to 24.87p per share, resulting in a total payout for the year to 35.96p, an increase of 7.1%. But that’s not all. City analysts think that this year’s shareholder payouts will be even more generous, pencilling-in a full-year dividend of 38.51p, which equates to a mouth-watering yield of 4.9%.

Upgraded dividend policy

For those who prefer to build their portfolio exclusively around blue-chip companies, then Severn Trent (LSE: SVT) is another of the water companies that has so far eluded predators. The £5.1bn FTSE 100 utility giant provides water services across a large geographical area focused on the heart of the UK, including the Midlands and mid-Wales.

Earlier this year, the Coventry-based group upgraded its dividend policy to deliver growth of at least the Retail Price Index (RPI) plus 4%, taking the proposed 2017/18 dividend to 86.55p per share. After the recent dip in the share price, that equates to a thirst-quenching yield of 4%. In the present climate, I reckon Pennon and Severn Trent could be among the few dividend stocks that remain ‘safe as houses’.

The post Is Pennon Group plc the best income stock around after 7% dividend hike? appeared first on The Twelfth Magpie.

More reading

• Here’s what you need to know about how Burnham policies might impact your Stocks and Shares and ISA
• Could Andy Burnham derail these FTSE passive income stocks?

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.

Severn Trent

When you’re looking for stocks to keep for the next 10 years, the business would have to possess a robust track record of returning value to shareholders, have a resilient business model and offer a long-term growth story.

With these three criteria, Severn Trent (LSE: SVT) comes to my mind. As a regulated water utility company with a monopoly over its customers, it generates stable earnings that grow steadily with inflation. This enables the firm to pay growing dividends to shareholders year after year, which makes its shares so attractive for investors looking for an inflation-beating income.

Regulatory risk

On the downside, investors need be wary of regulatory risk. Every five years, Ofwat, the water regulator, reviews and decides how much water companies need to invest in their infrastructure, and the level of customers’ bills needed to achieve this.

In a draft methodology paper published earlier this month, the next industry price review (PR19) looks set to be tougher than before. Ofwat is expecting to see significant improvement in affordability, customer service and innovation.

However, Severn Trent is also encouraged by the proposed changes to how good performing companies will be rewarded, as Ofwat is set to sharpen incentives for innovation by uncapping customer Outcome Delivery Incentive (ODI) rewards and increasing the role of cost sharing.

The firm has embraced the ODI regime, and is well placed to benefit from the changes as its comparative performance in the first two years of the current regulatory period has been encouraging. Its performance on water quality compliance and customer service is one of the highest in the industry, and as such, it expects to be well rewarded.

Near-term

In today’s trading update, the company upgraded guidance on its business services unit, and said it now expects both revenue and profit before interest and tax in this segment to grow on a like-for-like basis. In addition, the board continues to expect the company to deliver full-year trading performance in line with expectations and its prior guidance.

With shares currently trading at 18.4 times forward earnings and a prospective yield of 3.9% this year, Severn Trent seems to me reasonably valued.

Assura

Looking elsewhere, I reckon that healthcare property-rental company Assura (LSE: AGR) is another great long-term income play. The REIT is the largest primary care property investor and developer in the UK, with 422 medical centres and a total annualised rent roll of £76.9m.

While the healthcare property sector is not immune to macroeconomic risks, the sector is somewhat shielded by a chronic shortage of suitable properties and the non-cyclical nature of demand for healthcare. What’s more, Assura benefits from long lease terms, with an average unexpired lease term of 13.1 years, and inflation-linked leases, which offer it significant protection against a potential downturn.

In Tuesday’s trading update, the company announced that it had achieved a weighted average annual rent increase of 2.07% from 36 reviews settled in the three months to 30 June 2017. Looking ahead, it is set to grow its portfolio with £146m worth of new rental assets coming from acquisitions and new developments.

Shares in Assura currently trade at a 25% premium to its NAV, with a trailing yield of 3.7%.

The post 2 dividend stocks I’d buy and hold for the next 10 years appeared first on The Twelfth Magpie.

More reading

• Here’s what you need to know about how Burnham policies might impact your Stocks and Shares and ISA
• Could Andy Burnham derail these FTSE passive income stocks?

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.

Earnings per share have been a little erratic in recent years, but after a 9% increase in the year to March 2015, the company was able to pay a 5% dividend yield. With National Grid’s policy of lifting its ordinary dividend each year at least in line with the rate of RPI inflation, there’s a rise of around 2% predicted for the year just ended, with the interim payment already raised by that level. With National Grid shares having put on 11% in the past 12 months, to 988p, it would yield 4.4%.

National Grid shares are good for those who wish to reinvest dividends too, as the company runs a scrip dividend scheme so you can take new shares instead of cash — and to offset the dilution effect, it regularly buys back some of its own shares.

A forward P/E of around 15.5 is fractionally ahead of the FTSE average, but for such dependable income, I reckon that’s good value.

Retail recovery

After years in the wilderness, Marks & Spencer (LSE: MKS) could be back on track. The high street stalwart is, admittedly, still struggling to get its clothing onto the backs of younger shoppers — in its fourth quarter update it revealed a 1.9% fall in Clothing and Home sales. But M&S.com is doing well with an 8.2% rise in sales, and the shift to online selling is vital if M&S is to compete successfully with the likes of Next, ASOS, and the rest.

How those sales will translate into profit is something we’ll hear on 25 May, when the company is due to release full-year results — and there’s a modest EPS rise expected. M&S shares could certainly do with a boost, after shedding 25% over a year to 412p, and gaining just 4% over the past five years.

With EPS forecast to rise gently over the next two years, and with the dividend expected to yield 4.4% this year and predicted to rise to 5% by March 2018, we’re looking at a current P/E of around 12 and set to drop to under 11 in two years. That makes M&S shares look like decent value to me.

Reliable utility

A day later, on 26 May, we should have full-year results from United Utilites (LSE: UU), and that’s another bedrock of many a long-term portfolio. After three years of double-digit rises in earnings per share, there’s a fall back of 10% expected for the year to March 2016, but the company’s progressive dividend policy should still see the annual payment rise at least in line with inflation — as confirmed at interim results time back in November.

United Utilities shares have had a pretty flat 12 months, and the current price of 942p suggests a likely dividend yield of 4.1%, which is pretty respectable. On a P/E of around 20, United Utilities shares are the priciest of these three, but that’s the premium the market is happy to pay for super reliability.

The post 3 hot shares for May: National Grid plc, Marks and Spencer Group plc & United Utilities Group plc? appeared first on The Twelfth Magpie.

More reading

• Could Andy Burnham derail these FTSE passive income stocks?
• Down 15%! Is National Grid’s share price really a bargain right now?
• 3 British dividend stocks to consider for passive income this summer
• How much could a £25,362 Stocks and Shares ISA be worth in 10 years?
• 2 juicy income shares with big exposure to AI

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The companies that provide our gas, water and electricity enjoy a very predictable business. Demand doesn’t vary too greatly, and by taking on long-term energy contracts they can avoid surprises on the cost front, too. And that makes steady predicable dividends that much easier.

Look at National Grid (LSE: NG). It’s been lifting its annual dividend year after year, and offered shareholders a yield of 5% last year. Earnings are expected to only grow slowly over the next few years, but we still have steady dividend increases on the cards that would yield 4.6% for the year to March 2016, with forecasts lifting that to 4.8% by 2018 — the yield has dropped a little because the share price has risen 12% over the past 12 months, to 963p.

Those yields would be covered around 1.4 times by earnings, which is pretty strong for the utilities sector, and National Grid says it should be able to boost its annual cash payment at least in line with RPI inflation for the foreseeable future.

Biggest dividend

Over at electricity supplier SSE (LSE: SSE), we’re looking at even better dividends, with a yield of 5.9% paid in 2015 and with 6.3% forecast for this year on shares priced at 1,457p. That would be a little less well covered at 1.25 times, but it’s still reasonable for a utility firm. The share price hasn’t done much over the past five years, putting on just 17%, but that’s still ahead of the FTSE and those 6% dividends are around twice the long-term FTSE average.

SSE has the same dividend policy as National Grid, too, and at interim time told us it expects to increase its 2015/16 full-year dividend at least in line with RPI inflation — and it is targeting the same thereafter.

Water firm United Utilities (LSE: UU) actually has a couple of years of falling earnings forecast — 11% this year and 2% next. But analysts are expecting an 8% uptick for the year to March 2018, and in the long term the firm’s earnings should be solid. Perhaps unsurprisingly, United Utilities also has the same target of at least matching RPI inflation with its dividends, and in its first-half update said it expects to manage it at least until 2020.

With the shares at 894p, that would mean yields of 4.2% this year, rising to 4.4% by 2018, with cover of around 1.2 times. It’s looking like the weakest dividend of the three, but by way of compensation the share price has put on 57% over the past five years, easily beating the FTSE’s meagre 6%.

Long-term wealth generation

You’re not going to get the white knuckle ride that turns a lot of potential investors away from shares (and, on the other hand, excites a good few too), but safe investments like these three should help your ISA perform very well over the decades — and putting the cash into shares will almost certainly beat the pants off any cash ISA.

The post National Grid plc, SSE PLC And United Utilities Group PLC Could Be Good For Your ISA appeared first on The Twelfth Magpie.

More reading

• Could Andy Burnham derail these FTSE passive income stocks?
• Down 15%! Is National Grid’s share price really a bargain right now?
• 3 British dividend stocks to consider for passive income this summer
• How UK shares could build a £339,849 ISA
• How much could a £25,362 Stocks and Shares ISA be worth in 10 years?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

But, investors need to realise that depending on cyclical sectors to pay steady dividends was always going to be a risky strategy. Volatile commodity prices and demand which fluctuates according to business cycles meant free cash flows needed to fund dividends were never going to be dependable for long.

Until recently, many investors thought BHP Billiton and Rio Tinto were exceptions. They believed that because they were some of the lowest cost producers globally, they could always generate enough cash flow to pay consistently high payouts. With hindsight, we can now see how this was wishful thinking.

Defensive sectors

Defensive sectors have always been better places to look for reliable dividend stocks. Though not completely immune to dividend cuts, these companies tend to generate more stable cash flows with whatever economic conditions thrown at them.

BAE Systems (LSE: BA) is one such defensive stock. Hit hard by defence spending cuts in recent years, the company is now making a recovery. Sales and operating profits are expanding at their fastest paces in five years, growing 7.6% and 15.5%, respectively, in 2015. Robust growth is coming from both defence and civilian markets, with growth markets, such as cyber security, intelligence and electronics, offsetting slowing demand for military hardware.

Looking forward, recovering defence budgets in key US and European markets should lead to continued revenue and earnings growth, underpinning a steady outlook on dividends. BAE’s 4.2% dividend yield seems secure, as it is covered by almost 2.0x earnings; it is also supported by a strong balance sheet, with net debt of just £1.4bn.

Water utilities

Shares of water companies have long been seen as reliable dividend investments. This is because the predictability and transparency of their regulated revenues and capex plans means these companies can estimate with a high level of accuracy their future free cash flows.

Nevertheless, water companies are not free from risk. Every five years, Ofwat, the water regulator, conducts a price review to set out what they must commit to deliver during the period and the price they may charge customers. After its 2015 review, Severn Trent (LSE: SVT) made a 5% cut to its dividends this year, in order to fund a 5% cut in average household bills by 2020.

Severn Trent and Pennon Group (LSE: PNN) have another four years before their next regulatory review, giving investors a very high degree of visibility over dividend payments until then.

Shares in Severn Trent and Pennon Group both yield 3.9%, but Pennon has a slightly better dividend outlook. Pennon has pledged to increase its dividend by 4% above RPI inflation until 2020, whilst Severn Trent is just targeting above RPI inflation growth.

These stocks may not be the highest yielding ones on the market today, but they are relatively attractive compared to other safe forms of investments, such as savings and bonds. And unlike most other safe assets, water stocks act as a good hedge against inflation.

What’s more, with expectations that the Bank of England will delay raising interest rates until well into 2017, or possibly later, these reliable dividend stocks should remain in favour for longer than many analysts had previously expected.

The post BAE Systems plc, Severn Trent Plc & Pennon Group plc: Are These The Safest Dividend Stocks? appeared first on The Twelfth Magpie.

More reading

• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• 1 FTSE stock tipped to handily outdo Rolls-Royce shares by 2027
• Here’s what you need to know about how Burnham policies might impact your Stocks and Shares and ISA
• Could Andy Burnham derail these FTSE passive income stocks?
• Forget SpaceX, here are 3 UK tech stocks to consider buying without the high price tag

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Of course, bills will still go up, since water companies are allowed to include inflation in their price rises, but it is nevertheless being billed as a victory for consumers at a time when disposable incomes are still being squeezed in real terms. In addition to demanding a decrease in real terms prices, Ofwat has announced that water companies across the UK will invest around £44 billion over the next five years, which equates to more service for less money.

Impact On Water Companies

Clearly, a reduction in pricing and an increase in investment generally means one thing for water companies such as United Utilities (LSE: UU) (NASDAQOTH: UUGRY.US) and Severn Trent (LSE: SVT): reduced profitability. In addition, Ofwat’s expected reduction in the allowed cost of capital (from 5.1% to around 3.9%) means that it will be more difficult for water companies to increase borrowings in order to boost shareholder returns. However, rewards for meeting targets on leaks and make improvements to household supply could mean they receive rewards moving forward.

Of course, there is a two month window for the water companies to refer Ofwat’s decision to the Competition and Markets Authority but, following the initial application made to Ofwat, potential savings have been found (for example £376 million in the case of United Utilities) and so shares in United Utilities and Severn Trent are up today on the news.

Looking Ahead

Having risen by 33% and 14% respectively during the course of 2014, the dividend yields of United Utilities and Severn Trent have been squeezed somewhat. For example, they now yield 4.3% and 4.4% respectively and, as a result, remain relatively appealing income stocks in the short term. However, in the case of Severn Trent, its dividends are due to fall by 10.4% next year, which means that its yield could fall to 3.9% in 2015 and, furthermore, dividends are forecast to be only just covered by profit. While this is not an issue in the short run, it could lead to further dividend cuts, as the company is required to reinvest moving forward.

Bid Potential

While United Utilities and Severn Trent are hardly cheap at the present time, with them having price to earnings (P/E) ratios of 19.3 and 21 for example, they offer a relatively high degree of stability for investors. For example, they do not suffer from the same degree of political risk as do domestic energy suppliers and, looking ahead, they are potential bid targets – as was seen last year when Severn Trent turned down an approach from a Canadian-led group of investors.

Looking Ahead

So, while neither of them are cheap, United Utilities and Severn Trent could offer upside potential in 2015. That’s especially the case if investor sentiment remains uncertain and bid rumours once again begin to circulate. Today’s Ofwat ruling may mean that further efficiencies are required and, in the case of Severn Trent, dividend cuts seem to be on the cards.

In fact, as a result of this and its higher valuation, Severn Trent does not seem to offer as much appeal as United Utilities as an investment over the medium term. As such, while Untied Utilities remains an appealing buy, Severn Trent’s share price could come under pressure next year, unless a bid approach materialises.

The post Should You Buy United Utilities Group PLC And Severn Trent Plc After Ofwat Review? appeared first on The Twelfth Magpie.

More reading

• Here’s what you need to know about how Burnham policies might impact your Stocks and Shares and ISA
• Could Andy Burnham derail these FTSE passive income stocks?

Peter Stephens owns shares of United Utilities Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.