Trying to find a selection of the best buy-and-hold stocks for your portfolio isnt an easy task. Indeed, finding the best companies with the mostsustainable dividends and long term business models requires plenty of research. Many investors just dont have the time to do the amount of research required.
However, investing in the utility sector is usually a pretty safe bet. The sector is relatively defensive and there will always be customers willing to pay for utilities. Whats more, these companies tend to return the majority of their profits to investors, which translates into healthy dividends for shareholders.
Centrica (LSE: CNA) andSSE (LSE: SSE) are just two of the defensive utility plays that would fit well into any investors portfolio.
Unbeatable
When it comes to dividends, SSE and Centrica are unbeatable. For example, SSEs shares currently support a dividend yield of 6.4% and Centricas shares currently yield 5.7%. Both payouts are covered one-and-a-half times by earnings per share.
Still, SSE and Centrica arent going to make you a millionaire overnight. While the two companies do support some of the best yields around, their growth leaves a lot to be desired. City forecasts suggest that Centricas earnings per share are set to fall 8% this year, beforestabilisingduring 2016. SSEs earnings are projected to fall by 8% for theyear to 31 March2016, before ticking higher by 2% for the 12 months ending 31 March 2017.
Nonetheless, while growth remains elusive for Centrica and SSE, due to the nature oftheir businesses, the two companies have a certain degree of clarity over revenue streams. As a result, its unlikely management will suddenly take an axe to the dividend, giving investors a dependable income stream to rely on and build the rest of their portfolio around.
That being said, Centrica did announce a dividend cut earlier this year, but many analysts were expecting the company to make such a move after itsmisguided expansion into the oil & gas market. Now Centricas dividend payout looks safe for the time being. Payout cover has increased by 30% since the beginning of the year and the company is curtailing its exposure to the volatile oil & gas market.
Growth pick
If youre not interested in SSE and Centricas slow-and-steady business models,Utilitywise (LSE: UTW) might be a better pick.City analysts expect Utilitywise to report EPSgrowth of 37% for full-year 2016 and based on this prediction, the company is trading at a forward P/E of 7.7.
This might seem like a low valuation for a businessthats expected to chalk up EPSgrowth of 37% next year. But Utilitywises low multiple reflects the Citys concern about the way the company recognises revenue and the lack of cash the group is generating from operations.
However, today the group announced that its working hard to change the way it does business by renegotiating contracts with existing suppliers. These negotiations are designed to help the group reach its fundamental goal ofimproving cash conversion to offset concerns about the way the companyrecognises revenue.In theory, this change of strategy should translate into a higher valuation for the companys shares.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
