With the prospects for a first interest rate rise at the beginning of next year diminishing, investors could benefit from investing in these high yielding favourites.
British American Tobacco
British American Tobacco (LSE: BATS) has long been a favourite for dividend growth investors. The tobacco giant has a strong track record of delivering robust dividend growth, often in the double-digits. But, more recently, earnings and dividend growth has slowed considerably, as the proportion of cigarette smokers in developed countries has been steadily declining and increasing regulatory pressure have hurt the big tobacco brands.
Underlying EPS for 2015 is expected to be broadly flat on last year, at 208.7p, after a 4% decline last year. Despite the poor earnings outlook, British American Tobacco’s dividend is still secure, as it’s earnings can cover its dividend by 1.4 times.
The company is expected to raise last year’s annual dividend of 148.1p per share to 156.0p in 2015, and again to 163.6p next year. This gives its shares prospective dividend yields of 4.4% and 4.6% for 2015 and 2016, respectively.
National Grid
National Grid (LSE: NG) has been benefiting from the growth in renewable electricity generation, which has led to an accompanying need to invest in more transmission infrastructure. Underlying EPS grew 9% in 2014/5 and analysts expect it would grow modestly by 1% this year and 3% in the following year.
Although earnings growth is unimpressive, National Grid’s defensive nature is its key attraction. Its shares have a five-year beta of just 0.32, which means a 1% change in the FTSE All Share Index usually only has the effect of moving shares in National Grid by 0.32%. This is because substantially all of its revenues come from regulated businesses, where revenues are typically stable year on year as they are largely unaffected by changes in commodity prices and fluctuations in demand.
Shares in National Grid currently yield 4.9%, and it has a forward P/E of 14.6. With an outlook for dividend growth to be at least RPI inflation each year for the foreseeable future, its shares are attractive in a low interest rate environment.
United Utilities
United Utilities (LSE: UU) is another favourite for dividend investors. Water companies have steady and predictable cash flows, which allows them to pay reliable dividends. But, investors’ hunger for yield means the yields and valuations for many water companies have become stretched in recent years.
Shares in United Utilities yield just 4.2%, despite the company offering a similar prospect for dividend growth. Following its regulatory review last year, United Utilities is only promising to raise dividends by at least the rate of RPI inflation until 2020. Shares in United Utilities would also seem to be the most sensitive to an interest rate hike, as it is the most-indebted and lowest yielding of the three incomes shares.