All the talk these days is about when central bankers in the US and UK will finally start hiking interest rates.
Savers shouldn’t get too excited, because rates will only rise belatedly, and slowly.
The search for yield will continue, possibly for many years, as savings accounts struggle to recapture their former glories.
The good news is that you can get a solid yield today from FTSE 100 utility giants Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) and British Gas owner National Grid (LSE: NG) (NYSE: NGG.US) .
Our Friends Electric
Right now, Centrica yields 5.3% and National Grid yields 4.7%, roughly three times the current CPI inflation rate of 1.6%.
Better still, investors will also be buying into a rising income. National Grid management recently confirmed its long-term policy is to grow its dividend in line with RPI inflation for the foreseeable future.Â
Right now, RPI is 2.5%, so the real value of that dividend should rise faster than CPI inflation.
Centrica’s management is also committed to “real dividend growth”.
Global Warming, Share Price Cooling
Like most utilities, National Grid and Centrica are seen as safe, defensive stocks, but any saver tempted by the higher income must be aware that their capital is at risk.
Investors in Centrica will have seen the value of their stock fall by around 18% in the past 12 months, although over five years, it has delivered a positive return of 38%.
Centrica was hit by falling energy demand following the recent mild UK winter, which contributed to a 35% drop in operating profits in the first half of this year, down from £1.58bn to £1.03bn.
Ironically, extreme weather in the US caused by the polar vortex cost it £65 million.
If our climate does become more extreme, Centrica could blow hot and cold.
Political Hot Air
Politics has blown another chill wind in Centrica’s direction. Its share price has never recovered from Labour leader Ed Miliband’s threat to freeze energy bills for 20 months if he wins the general election next May.
Although Miliband’s latest populist wheeze, to revoke energy company licenses if they misbehave, doesn’t appear to have had the same impact.
An investigation by the Competition and Markets Authority about lack of competition in the energy market has cast another shadow over Centrica, especially since it won’t report until December 2015.
Centrica may be feeling the political heat, but that does allow you to buy it at a knock-down valuation of just 12 times earnings. If you’re patient, and understand the risks, now could be a good long-term buying opportunity.
Gimme Some Juice
National Grid, by comparison, has been flying. Its share price is up 20% over the past 12 months. Over five years, it has grown nearly 70%. And that’s on top of the yield.
Stocks like this have slaughtered the return on cash in recent years.
National Grid has a strong balance sheet, underpinned by regulatory revenues, which gives a solid underpinning to its dividend. Management expects “another year of solid operating performance and financial performance and asset growth” in 2014/15, when it should increase its regulated assets by 5%.
Trading at 13.6 times earnings, National Grid is a little more expensive than Centrica, and the yield is lower.
But it may also be the more solid bet of the two.
High-Energy Yields
National Grid and Centrica are the type of company that investors seek out in times of trouble. That could work in their favour if current geopolitical troubles worsen.
Even if we do get that first rate hike, these electric yields will still sizzle by comparison.