Tap into water firms to beat dividend drought

The past week’s stock market turmoil, sparked by the Covid second wave and apprehension over the US election result, has hit the value of many shareholders’ portfolios. 

This is not the moment to panic, but it is the moment to remember that utilities – like water, light and heat – will always be in demand. 

If the shares in the firms that provide these essentials also give you an income, that could prove one bright spot in a tricky climate. 

If you have always thought of the water industry as dull, or slightly murky thanks to controversies over pollution and governance, this may be the time to change your mind. 

The shares in some energy companies could also light your fire if you are trying to boost the return on your portfolio – and make it more planet-friendly. 

In the past week, one water company has shown that it values small shareholders at a time when they are not only being deprived of dividends but also shut out from so many attractive share offers. 

Pennon, owner of South West Water, has just added 52,000 new individual investors, bringing the total to about 67,500. Chief executive Susan Davy wants ‘to create a new kind of water company’. 

As part of this, she has launched a scheme allowing customers to benefit from the company’s outperformance by receiving a £20 discount on their bills, or two shares.

Shareholders in Pennon and the two other listed companies in the industry – Severn Trent and United Utilities – can also rely on a decent income. 

The dividend drought has not affected water firms – good news after the data on all UK company payouts. 

In the third quarter, about two-thirds of UK businesses, including banks and retailers, cut or cancelled dividends; £18bn was distributed – 49 per cent down on the same period of 2019. 

Pennon has a yield of 4.7 per cent and dividends are set to be increased by the rate of inflation, plus 2 per cent until 2025. The company is now seeking a home for the £3.75billion it made from the disposal of its Viridor waste and recycling division. 

Barclays estimates there could be a 100p-a-share value upside if Pennon could turn around a lower-return competitor. 

If a suitable target does not emerge, the Viridor windfall could be distributed to shareholders. The yields at United Utilities and Severn Trent are 4.79 per cent and 3.94 per cent respectively. Deutsche Bank expects Severn Trent to announce a rise in its dividend to 40.6p a share later this month. 

The pandemic may be lowering the water companies’ revenues from commercial customers and will add to bad debts. 

Yet Barclays analysts forecast that the performance of Pennon, Severn Trent and United Utilities ‘should remain strong’. 

Laith Khalaf of AJ Bell believes that a spread of water companies is a good way to supplement your income, but he emphasises that the price of this is an element of political risk. 

Labour’s election threat to nationalise the industry may now seem like a distant memory. 

But water and other utility companies are under heightened scrutiny from the Government and pressure groups over their environmental impact and the way they treat customers. 

If November chills are reminding you that higher bills for other utilities are coming, you could also contemplate a bet on National Grid, the gas and electricity distributor. It is increasing its dividend, despite coronavirus damage to profits. 

SSE (which is no longer a domestic supplier) will be spending some of its haul from selling stakes in its waste division on maintaining dividends – and in the fast-growing business of renewable energy projects, like wind power. In the first half of this year, renewable energy generation provided 46 per cent of the UK’s power needs. 

One way to back this revolution would be an investment in Premier Miton Infrastructure. 

This trust holds National Grid, but also the likes of Atlantica Sustainable Infrastructure which operates in North and South America. James Smith, the manager, describes his trust as a ‘one-stop global renewable energy shop’ with a yield of 7.5 per cent. 

In an era of uncertainty, companies whose services that we cannot live without and that are cleaning up their act should be the long-term winners.

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