Investment booms and busts come and go, fads are here today and gone tomorrow, and today’s crisis usually appears as but a blip on the long-term share charts. What’s the secret to avoiding the short-term heartache? How about sticking with solid long-term dividend payers?
Support United
United Utilities (LSE: UU) is a great example, and its shares are up 1% to 996p after this morning’s trading update.
United, which manages electricity distribution, water supplies and waste water management, has seen its shares rise by 58% over the past five years. On top of that, if you’d bought some in September 2011, you’d have enjoyed an additional 29% in dividends — 87% over five years (and more if you’d reinvested your dividend cash in additional shares), which is a terrific performance.
Trading for the first half of this year is apparently in line with expectations, with revenue expected to be “slightly lower than the first half of last year” following the launch of the company’s Water Plus business retail joint venture, but underlying profit should be marginally higher.
Net debt is predicted to be slightly higher at 30 September, partly due to regulatory capital expenditure, which is expected to reach around £800m for the full year.
United’s dividend yield has dropped a little due to recent share price gains, but forecasts still indicate yields of around the 4% level for this year and next, and at full-year results time back in May the company reiterated its target of “an annual growth rate of at least RPI inflation through to 2020.“
The only minor caution might be United’s forward P/E multiples that currently stand at around 21.5, but the shares do tend to command a top valuation and investors are prepared to pay a little more for such dependable long-term income and safe prospects.
A better value alternative?
National Grid (LSE: NG) is in a very similar boat to United Utilities, with a clear view of expected income and expenditure, and in a business where there’s really very little competition. And its shares are on significantly lower P/E valuations, of around 16.5 this year and next, with forecast dividends offering similarly attractive yields of better than 4%.
Five year returns have been even better than United Utilities, with National Grid shares up 69% since this time in 2011. And buyers then would have added 33% in dividends to their pot for a total of 102% (and again, even more had they reinvested the cash in additional National Grid shares — the firm offers a scrip dividend scheme).
National Grid’s first-half results are due on 10 November, and we have a couple of fairly flat years forecast for this year and next — EPS is predicted to rise by 1% and 3% respectively. The dividend looks set to keep on climbing too, with the company telling us at full-year results time in May that growth should be sufficient to maintain its policy of “growing the dividend per share at least in line with RPI each year for the foreseeable future.“
That, to me, is the secret to real long-term dividend success. An above-average dividend from a company with a progressive policy and plenty of cashflow to cover it is surely going to provide the best long-term performance.