Is it really possible to find dividend stocks you can buy and hold forever? Today I’m looking at two stocks offering yields of more than 6% and, in my view, both have the potential to provide auto-pilot incomes for many years.
Indispensable?
Utility stocks may lack glamour and can be exposed to oil and gas prices, but they offer investors the promise of reliable profits from large-scale infrastructures that cannot easily be replaced.
SSE (LSE: SSE) is my preferred pick in this sector, partly because it’s the UK’s largest generator of renewable electricity. In total, 1,163GWh (23%) of the group’s power was generated by wind, biomass and hydroelectric generators during the first quarter of this year.
Another attraction is the group’s networks business, which distributes gas and electricity throughout Scotland and in some areas of the UK. Even in a future where many homes have microgeneration facilities, such as solar panels, I believe we’ll still need a sophisticated national grid to balance supply and demand for power at different times, in different places.
Perhaps the weakest part of SSE’s business is its retail arm, which continues to face pressure from customers moving to other smaller suppliers. During the three months to 30 June, the group’s total number of energy customer accounts fell by 230,000 to 7.77m.
Warmer weather meant that the amount of energy used by each household was also lower than during the same period last year.
However, despite these pressures, management confirmed today that its dividend is expected to increase by “at least RPI inflation” this year, in line with its long-standing policy. Future years are expected to yield similar increases, and SSE expects to be able to maintain dividend cover of between 1.2 and 1.4 times adjusted earnings.
The stock was flat after today’s Q1 figures were released. At 1,475p, SSE offers a forecast yield of 6.3% for the current year. In my view this remains a strong choice for income investors wanting stocks they can buy and forget.
A real 8.2% yield?
I’d normally suggest avoiding any stock promising a dividend yield of 8.2%. But consumer payment processing group PayPoint (LSE: PAY) could be an exception.
This company, which makes most of its money from bill payment terminals in convenience stores, generates a lot of surplus cash. Net cash stood at £53.1m at the end of last year, and the board is promising to return a total of £125m to shareholders over the five years to 2021, in addition to ordinary dividends.
Despite this, PayPoint’s shares have fallen out of favour and are down by 14% so far this year. One concern is the limited growth potential of the group’s cash payments business. But the company is focusing on growth through other payment channels and on developing its payment business in Romania, which it describes as “a rapidly growing market”.
If well managed, I believe PayPoint has the potential to generate a very attractive stream of income for investors over the next few years. The firm benefits from high profit margins, a strong balance sheet, and fairly low capital expenditure requirements.
Although the decline of its traditional cash payment business is a risk, I believe this group’s high yield and strong cash generation means that it deserves a closer look.