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Summary
- Companies belonging to the Utility sector usually have stable businesses and are considered regular dividend payers
- Dividend stocks are stocks which give their holders regular income and are preferred by investors who are risk averse
- In times of high market volatility, like the current pandemic phase, investing in growth stocks can be risky due to high market volatility, whereas income stocks will provide safety of capital with a regular stream of income.
Dividend stocks are considered as safer income avenues than the more aggressive growth stocks. Good dividend paying stocks are generally mature and stable companies who have a good cash inflow, and their businesses are relatively less impacted by business cyclicity and economic shocks.
During the current pandemic, we have seen that utility and grocery companies were relatively less impacted by the lockdown compared to businesses of other industries, which confirms the above assertions. The stocks of these companies thus proved to be safe investments where an investor can park their money and earn a low yet steady income while the markets improve. Dividend stocks purchased during market downturns also tend to give their investors a higher dividend yield when the markets improve, as the investors would benefit for a lower cost base.
The London Stock Exchange hit a low in the month of March when the lockdown was imposed in the country and several good dividend paying stocks were available then for a bargain. Since then, however, the market has improved, and the prices have recovered for many of these stocks. Yet there are still some stocks that have good dividend yield potential and can be looked upon for 2021.
Companies belonging to the Utility sector have stable businesses and are regular dividend payers and can be relied upon during times of market uncertainty.
Four prospective income stocks in the Utility sector and what to expect in 2021
- Severn Trent plc (LON:SVT) – This company provides drinking water to nearly 4.5 million households in the UK. Since the outbreak of the lockdown, not much fall has been seen in the household demand for water in UK. However, some reduction was seen in demand from businesses. The company faces less risk on its sales, but there could be some pressure on the recovery of debts. It is highly likely that the company would continue to pay dividends to its investors in 2021 as it faces little downside risk on its revenues and profitability.
Six-months performance (Source- Thomson Reuters)
As on 09 November 2020, the share of Severn Trent plc was trading at GBX 2,450.00 per share (2.37 PM GMT+1) losing 0.2 per cent over previous day’s close.
- United Utilities Group plc (LON: UU.) – United Utilities is the largest drinking water supplier, water treatment operator and renewable energy producer in the United Kingdom which caters to nearly 7.3 million people.
In a trading statement released by the company in September, it has reported that it has recorded only a minimal decrease in water demand from its customers. Though the company expects its revenues for H1 2020 to be lower than that of H1 2019, but its business continues to be resilient and expects to turn out a profit for the period.
Six-months performance (Source- Thomson Reuters)
As on 09 November 2020, the shares of United Utilities Group plc have been trading at GBX 881.00 per share (2.35 PM GMT+1) gaining 1.19 per cent over previous day’s close.
- Pennon Group plc (LON:PNN) – Pennon group provides drinking water and wastewater treatment in the South West of England. The company serves around 1.7 million customers in the country. In a trading statement released in the month of September the company had stated that it is on track to deliver resilient financial results in line with management expectations. The company expects to report a nominal net revenue impact in 2020-21 of £10 million.
Six-months performance (Source- Thomson Reuters)
As on 09 November 2020, the shares of Pennon Group plc have been trading at GBX 1,034.50 per share (2.32 PM GMT+1) gaining 1.18 per cent over previous day’s close.
- SSE plc (LON:SSE) – The company is a renewable energy production company. It produces electricity from wind, hydropower resources as well as from waste. The company was also a distributor of electricity and gas in the country till January 2020, when it sold this segment to OVO energy. The company is constantly investing in renewable assets with an ultimate objective of making the UK a Net- Zero carbon emission country. SSE plc, however, may not be able to provide dividends to its shareholders in short to mid-term given its extensive capital investment plans.
Six- months performance (Source- Thomson Reuters)
As on 09 November 2020, the shares of SSE plc have been trading at GBX 1,366.00 per share (2.31 PM GMT+1) gaining 2.42 per cent over the previous day’s close.
The second lockdown could make good dividend paying stocks affordable again. The year 2021 is a year which will bear witness to several important transitions taking place in the United Kingdom. The EU common area regulation will cease to be on the UK from 31 December 2020, while the new trade deals the UK has been entering into with other countries will start showing their effect on the British Economy. These extinguishments of old business arrangements and the creation of new ones will create opportunities for investors to rejig their portfolios for a better capital gain as well as dividend income returns.
