Every portfolio needs a solid backbone of defensive, dividend paying shares, which generate a steady stream of income and allow you to sleep soundly at night.
Stable earnings are key for dependable dividend growth, so when looking for a long-term dividend investment, companies with the most predictable earnings are usually the best bet.
Unfortunately, based on recent trends, SSE and Centrica both fail the stable earnings criteria in my opinion. Only last week, Centricatrimmed its full-year profits guidance yet again,as warm weather weighed on performance.
Earnings per share were revised down froman earlier range of 21p to 22p, down to between19p and 20p. The week before, SSEwarned that full-year earnings will be at the lower end of expectations because of competition in the energy market.
On the other hand, National Grid has no such concerns and the company remains on course to achieve steady earnings growth this year.
After taking only a quick look at Centricas figures, I feel that its reasonable to assume that the companys dividend payout is going to come under pressure in the near-term. Specifically, at present levels the companys dividend yield stands at 5.8%, however, this payout of 17.6p per share, will only just be covered by earnings next year, according to the above forecasts.
SSEs management hasstated that the companys dividend is safe for the time being. However, dividend payments are looking increasingly exposed as debts rise, and customers and energy usage fall.
So, once again National Grid comes out on top. The companys stable earnings, along with its clear growth outlook should support steady dividend growth for the foreseeable future. At present levels, National Grid supports a dividend yield of 4.5% and the payout is covered one-and-a-half times by earnings per share.
When it comes to growth, theres one clear winner. National Grid is not facing the same political and regulatory pressures as Centrica and SSE, therefore I feel the company is by far the best pick.
For example, if the Labour party wins the next election,theres a chance that the party could freeze energy prices bad news for the two energy giants as they would no longer have any control over their own pricing. In a business such as energy supply, where margins arehighly uncertain due to fluctuations in the cost of production and supply, fixed prices could be really bad news.
National Grid is unlikely to face the same pressures, as the company is only involved in the transmission of electricity. Additionally, National Grid is expanding internationally, something Centrica has tried to do but is struggling.
The bottom line
Overall, after considering all of the above factors, it looks as if National Grid may be the best pick for your portfolio. The companys earnings are rising steady, the dividend is reliable and the group has plenty of room to drive growth. In comparison, the outlooks for Centrica and SSE are just too uncertain.
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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.