The stock market crash has demonstrated the value of holding defensive FTSE 100 dividend stocks in your portfolio, alongside those whizzy growth shares you love. Some investors turn their noses up at the big utilities, but they shouldn’t.
They’ve kept paying dividends despite the stock market crash, while others have fallen by the wayside. They’ll rarely head the FTSE 100 leaderboard, but should deliver the long-term income you need to fund a comfortable retirement. You can take it tax-free inside a Stocks and Shares ISA.
The big attraction with utilities is that people still need gas, electricity and water, even in the middle of a pandemic. While business demand fell, home usage shot up as a locked-down nation had to light and heat their homes, and power their laptops and TVs. Another big attraction is that revenues are regulated, making them more reliable.
Heroes of the stock market crash
The utilities also fell during the crash, of course. The damage was relatively minimal, but this does offer investors a buying opportunity.
The National Grid share price is down 18%, measured over six months, which looks like a tempting entry point for me. Especially since the yield now stands at a sizzling 5.73%.
The National Grid share price trades at just over 15 times earnings, pretty much where it always stands. I’d buy it, whatever the economic weather.
The stock market crash has largely washed over water utility Pennon Group. It is actually up 40% measured over 12 months, which shows that utilities can offer capital growth too. It trades at just over 16 times earnings which, again, isn’t too pricey. In return, you get a yield of 4.37%.
Another water company, United Utilities Group, has recovered strongly but trades 14% lower than six months ago. The stock looks a relative bargain after the market crash, at 13.23 times earnings, while yielding 5.16%. In May, United Utilities actually increased its final dividend, although it’s reviewing its dividend policy after incurring £56m of Covid-19-related costs. This contributed to a £5m decline in annual operating profits.
FTSE 100 dividends galore
Utilities aren’t completely immune to current issues. For example, the recession is likely to lead to a rise in unpaid customer bills. Water and waste company Severn Trent has warned of Covid-19’s impact, with falling business consumption and rising bad debts. It still managed to increase its final dividend despite the stock market crash, in line with its policy of increasing its payout by at least retail price inflation plus 4%. It trades at just over 16 times earnings and yields 4.31%.
Power giant SSE has been one of the FTSE 100’s top dividend stocks for years. It still plans to declare a dividend in November, despite a predicted £150m-£250m hit from Covid-19, and the £7.5bn cost of investing in low-carbon projects over five years. SSE yields 6.31% although cover is thin at 0.9. It trades at around 15 times earnings.
None of these stocks look expensive after the market crash. All offer generous yields. Hold for the long term, and they could help you get rich and retire early.