Some investors dismissutility stocks asdull but in the age of low interest rates the yields they offer areenough to get your blood racing. Income streams of up to 6% are certainly less boring than getting 1.5% on your savings. Here are four to consider.
Centrica
Investors in British Gas owner Centrica (LSE: CNA)probably crave a little dullness by now. Its share price has delivered plenty of action, but sadly, of the wrong type. The stock is down 42% in the last two years: this type of thing wasnt supposed to happen to a utility.
Even the surprise Conservative victory in May, which put Ed Milibands proposed utility price freeze to the sword, did little to help its recovery. Management recently cut theinterim dividendby 30% but it is still forecast to yield 5.4% in2016. Centricascost-cutting programme should protectprofits, and with rate hike prospects fading again,itoffers a temptingincome. At 12 times earnings, investors can hope forsomelong-term growth as well.
Pennon Group
Water, sewage and waste specialistsPennon Group (LSE: PNN) offers a soggy yield compared to Centricabut 4.34% is still worth having. Management recentlyhiked the dividend by5% when announcing its full-year earnings and the future looks progressive, with targeted annualdividend hikesof 4% above RPIto 2020.
Pennonsshare price has taken a recent hit, falling12% over the past three months, yet it still trades at a relatively pricey 18.37 times earnings. Worryingly,EPS isexpected to fall around 6-7% forthe next twoyears, before rebounding 9% in 2017. By then, the yieldis forecast to hit5%. The only downsideis thatat todays valuation, Pennon may be a little pricey for some.
Severn Trent
Severn Trent (LSE: SVT) has been behaving like a utility stock is supposed to behave. Share price growth has been steady over the last five years: it has grown more than 50% over that time. Like Pennon, it looks expensive at just under 20 times earnings, andyields a steady 4.05%.
Myconcern is that itspremium valuation seems to have been pumped up by speculation and rumour. I never buy stocks on takeover talk, as suchtalk is cheap (but costly if it comes to nought). A forecast 15% drop in EPS in the year to next March is a concern, andanalystsexpect the yield to stick around todays underwhelming levels. A stock to watch, but not one I would rush to buy right now.
SSE
SSE (LSE: SSE) offers the brightest yield of all these four utility stocks at an electric 6.19%, available at just under12 times earnings. This has been a great income stock, with long-term progression of 10% a year since 1992, but asearnings and cash flow come under pressure, some investors have expressed concerns that the dividend might evenbe cut.
No sign of that yet, with management promising to raise it by at least RPI going forwards. With the share price slipping12% in the last three months, now could bea handy time to lock into a yieldthat gives youalmost 13 times base rate.
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Harvey Jones 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.
