Water provider

As a quick reminder, Severn Trent is one of the largest suppliers of water to homes and businesses in the UK. As well as operations here, it also has a presence in the US and Europe.

So what’s happening with Severn Trent shares currently? Well, as I write, they’re trading for 2,779p. At this time last year, the stock was trading for 2,669p, which is a 4% return over a 12-month period.

Severn Trent shares have risks

Let’s start with the negatives. Firstly, regulation in the water industry is extremely tight. This relates to quality of services, drinking water, and disposal of waste. Furthermore, rising prices are also closely monitored. If Severn Trent were to fall foul of regulatory issues and issued with financial penalties, it could see performance and returns affected. Equally so, if prices were capped, the same could happen as well.

Looking at the Severn Trent share price, I noticed that it looks more expensive than its peers. The average price-to-earnings ratio for water companies is around 16. Severn Trent’s ratio is closer to 19. Is growth already priced in? On the other hand, Warren Buffett once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. Is Severn Trent just a quality company currently trading for a premium price?

The bull case and my verdict

Severn Trent’s defensive capabilities are definitely a plus point for me. In times of economic uncertainty and volatility, it is common for investors to protect their portfolios with so-called recession-proof stocks. Severn Trent comes under that bracket for me personally. After all, water is an essential part of life for consumers and many businesses alike.

Performance is an important aspect of a business I refer to when considering investment viability. I do understand that Severn Trent’s past performance is not a guarantee of its future, however. Looking back, I can see it has grown revenue and profit year on year for three out of the past four fiscal years. 2020 performance dropped due to the pandemic but bounced back to surpass pre-pandemic levels in 2021.

Next, shareholder returns are underpinned by performance. Severn Trent shares pay a dividend which would boost my passive income stream. Its current dividend yield stands at just less than 4%. This is in line with the FTSE 100 average of 3%-4%. I am aware that dividends can be cancelled at the discretion of the business at any time, however.

All things considered, I would add Severn Trent shares to my holdings. Its defensive capabilities, coupled with an impressive performance track record help me make my decision. In addition to this, its passive income opportunity seems too good to miss right now.

A defensive stock that’s taken a hit

As a quick disclaimer, no stock is completely recession-proof. If the UK goes into a recession, even a defensive stock could still fall in value. The reason why I’d still buy the specific stock is because it should outperform many other stocks in the index.

The first example that I like is Coca-Cola HBC (LSE:HBC). The share price has fallen by 33% over the past year. From that angle, some might wonder why I’m considering this stock as protection against a recession?

The main reason for the fall is due to the invasion of Ukraine. Most of the tumble came in February when Russian forces entered Ukraine. Coca-Cola HBC had to stop production at the facility in Kyiv, with operations being hampered throughout the region.

However, when I consider the company against a backdrop of a recession, I still think it makes sense to invest. The core product is a consumer staple. Even other third-party bottling requests that it services relate to coffee, juice and some alcoholic beverages. Regardless of the state of the economy, I feel that consumers will still buy these goods.

In fact, when I consider the valuation, I think I might buy the stock now and not wait! The fall has reduced the price-to-earnings ratio down to just under 14, making it a much more appealing play than it was at the start of this year.

A recession stock from the utility sector

The second stock that I think could hold ground well in a recession is Severn Trent (LSE:SVT). The water stock doesn’t just have operations in the UK, but also some diversification from the US and Europe. Over the past year, the share price is up 13%.

My focus is on the UK business. As a utility provider, I don’t feel that the households and businesses it supplies to will cut off water in a recession. It could see lower demand as consumers reduce water usage to try and save money. Yet we all need water for a variety of uses, and this won’t stop during whatever stage of the economic cycle we’re in!

The full-year results for 2021 also impressed me. Group turnover increased 6.4% year-on-year, with profit before interest and tax also up 7.5%. This enabled the dividend per share to tick slightly higher, meaning that the current dividend yield is 3.57%.

This recession stock isn’t perfect, though. There have been some issues recently regarding concerns about the sewage and cleanliness of some plants. The company has to be careful to sort this out to prevent reputational damage that could impact the share price.

I’m putting Severn Trent on my watch list for the moment. If the UK does head towards a recession, I’ll be investing.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

BT

What it does: BT is a multinational telecommunications provider, operating in over 180 countries across the globe.  

By Dylan Hood. Inflation is creeping up across the globe, and as such, many high-growth stocks are starting to fall back from their lofty valuations. Value stocks like BT (LSE:BT-A) are performing well, as they have the power to control their pricing power in line with inflation. BT also has an abundance of well-established infrastructure, which means its fixed costs won’t increase much as prices start to rise.

In addition to this, BT has a healthy dividend yield of just below 4%. This is above the FTSE 100 average of 3.6%, and I expect this dividend to consistently remain high in the coming months. This is due to the strong consumer base that BT already has, and the new projects it has in the pipeline to drastically upgrade its network.

Dylan Hood does not own shares in BT.

Reckitt

What it does: Reckitt is a leading consumer goods company that is focused on health and hygiene products.

By Edward Sheldon, CFA. There are several reasons I’ve chosen Reckitt (LSE: RKT) as my top income stock for June.

The first is that the company offers a healthy yield. At present, analysts expect Reckitt to pay out 176p per share in dividends for 2022. That puts the yield at near 3%.

The second reason I like Reckitt is that the company is relatively recession-proof. Its products, which include Nurofen painkillers, Dettol wipes, and Strepsils lozenges, tend to be purchased by consumers no matter what’s happening in the global economy. This is a valuable attribute in the current economic environment, to my mind.  

Finally, City analysts are currently upgrading their earnings estimates here. This broker activity should support the share price.

Of course, there are risks to consider. One is the company’s valuation, which is higher than the average FTSE 100 valuation. Another in inflation. All things considered though, I see a lot of appeal in this income stock right now.

Edward Sheldon owns shares in Reckitt.

Greencoat UK Wind

What it does: Greencoat UK Wind is the UK’s largest pureplay investment fund specialising in renewable wind power infrastructure.

By  Zaven Boyrazian. With oil prices shooting through the roof, the renewable energy sector has lost a lot of attention. Yet while there is plenty of struggling, unprofitable operations in this industry, Greencoat UK Wind (LSE:UKW) is the exception.

The real-estate investment trust invests in on- and off-shore wind farms scattered across the UK, allowing investors to own part of this infrastructure. All of the clean electricity generated is sold wholesale to the country’s largest energy companies, including Centrica and SSE. And the proceeds are returned to shareholders through an impressive 4.9% dividend yield.

With skyrocketing energy prices, the firm looks primed to generate copious amounts of passive income for the rest of 2022. While the regulatory price caps on energy eliminate pricing power, the group’s 86% net profit margins can easily absorb any adverse regulatory adjustments.

That’s why I believe this could be one of the best additions to my income portfolio today.

Zaven Boyrazian does not own shares in Greencoat UK Wind, Centrica or SSE.

Taylor Wimpey

What it does: A residential developer, operating from 23 regional businesses across the UK

By Paul Summers: As a rule of thumb, the higher the dividend, the more suspicious one needs to be about whether it will get paid. Even so, I’m struggling to ignore the potential income on offer from one of the UK’s biggest housebuilders: Taylor Wimpey (LSE: TW).

Right now, the FTSE 100 member yields 7.4% based on analyst projections. That’s among the highest in the index. Positively, Taylor Wimpey’s record of growing payouts is also pretty stellar. 

One concern is that the housing market could slow as interest rate rises begin to bite. Then again, I’d say a lot of this is already baked in the share price. Having tumbled over 25% in value in 2022 so far, Taylor Wimpey’s shares trade at less than seven times forecast earnings.

The need for me to remain diversified is as relevant as ever but I’d say the risk/reward trade-off looks attractive here.

Paul Summers does not own shares in Taylor Wimpey.

Severn Trent

What it does: Severn Trent predominantly provides water and waste services to 4.6m customers under the businesses Severn Trent Water and Hafren Dyfrdwy.

By Andrew Mackie: 2022 proved to be a year of recovery for Severn Trent (LSE:SVT). Its regulated water business saw turnover jump 6.5% to £1.8bn driven primarily by patterns of usage amongst business customers returning to normal.

In the present backdrop of high inflation and slowing economic growth, I am always on the look-out for businesses that can provide a steady stream of earnings growth and dividend returns. Severn Trent definitely ticks the boxes in this respect. It has a progressive dividend policy, which will grow by at least CPIH (consumer price index together with housing costs).

Two major risks are 1) a large, and growing, net debt position with 27% index-linked and 2) increasing operating costs particularly in energy and chemicals. However, on the latter point, the business has a natural economic hedge given that it generates 50% of its total power consumption in-house.

With the share price exhibiting some weakness as of late, I see this as an attractive entry point to a purely defensive play.

Andrew Mackie does not own shares in Severn Trent.

Rio Tinto

What it does: Rio Tinto explores, mines, and processes mineral resources worldwide. The firm offers aluminium, copper, and gold among other metals in its large portfolio.

By John Choong Having had a volatile first quarter, Rio Tinto (LSE: RIO) — the second biggest iron ore manufacturer in the world — is riding the wave of rising iron ore prices yet again, as it’s up 20% this year.

After the firm reported record-breaking numbers in its last financial year, it declared an extraordinary dividend of £3.07 per share, with a special dividend of £0.46 as well. While these numbers are unlikely to continue in the next dividend declaration, I believe that the Rio Tinto share price still has plenty of growth in the medium term.

With China being its largest customer, Rio’s top line undoubtedly suffered when China imposed a number of city-wide lockdowns, stifling manufacturing growth. However, China just announced a further easing of curbs in Shanghai and Beijing recently. This should positively impact PMI figures and bring much needed relief to Rio’s order books. As such, I expect its share price to continue growing with high dividend payments to continue.

John Choong has no position in Rio Tinto

IG Group Holdings

What it does: IG Group operates technology, platforms, products and exchanges for traders and investors worldwide.

By Kevin Godbold. In March 2022, IG Group Holdings (LSE: IGG) released an upbeat third-quarter revenue report. Client numbers rose just over 30% year on year to an all-time high against a “challenging” comparative period that included the ‘meme stock’ craze.

IG thrives on market volatility, which helps to attract clients and encourages them to trade. Meanwhile, near 716p, the share price is around 18% lower than a year ago. The stock market could be discounting the possibility of lower earnings ahead. But I reckon the healthy customer base will likely drive IG’s profits through many periods of market volatility in coming months and years.

IG operates in a sector with regulatory risks. But the stock looks good value to me, and the business has strong multi-year cash flow and dividend records. Although analysts’ estimates can change, the forward-looking dividend yield is just over 7% for the trading year to May 2023.

Kevin Godbold owns shares in IG Group Holdings.

B&M European Value Retail

What it does: B&M European Value Retail runs discount variety retail stores in the UK and France. The group’s brands are B&M, Heron and Babou.

By Roland Head. Shares in B&M European Value Retail (LSE: BME) have fallen by 40% so far this year. The slump has come as investors have priced in a post-pandemic slowdown in sales growth.

I think this sell-off has gone too far. This business has always been much more profitable than regular supermarkets and enjoys strong cash generation.

Despite these attractions, B&M shares are currently trading on just nine times trailing earnings, with a 4.3% dividend yield.

There are some risks, of course. B&M has expanded rapidly, and CEO Simon Arora is now planning to retire.

Mr Arora has led the business with his brother Bobby since acquiring it in 2004. There’s no guarantee that B&M’s next CEO, current finance boss Alex Russo, can maintain this success.

Personally, I think B&M’s proven business model will stand the test of time. I think the shares look like a good income buy today.

Roland Head does not own shares in B&M European Value Retail.

BAE Systems

What it does: BAE Systems is an aerospace and arms manufacturer that operates all around the world and is the largest defence contractor in Europe.

By Andrew Woods. Over the past two years, BAE Systems (LSE:BA.) has had dividend yields of 7.7% and 4.6%. This equated to payments of 37.5p and 25.1p in 2020 and 2021, respectively. With a significant order book following escalations in global conflict, it is conceivable that the 2022 dividend could be greater.

The company has not been immune from problems caused by the pandemic, however. It has faced supply chain issues for the raw materials used in its products, like steel. Despite this, the firm did not change its full-year guidance and expects sales to increase by between 2% and 4%.

The war in Ukraine has also prompted a rethink in many countries on the size of defence budgets. If governments choose to increase defence spending, this could be good news for BAE Systems. As the seventh-largest defence contractor in the world, it is likely that many nations will turn to the company for supplies of weapons and aircraft. 

Andrew Woods does not own shares in BAE Systems.

Aviva 

What it does: Aviva is a multiline insurer focused on core markets in the UK, Ireland and Canada. 

By G A Chester. I was hugely impressed by Amanda Blanc when she joined Aviva (LSE: AV) as chief executive two years ago. Her first presentation was assured and waffle-free. She set out the company’s strengths and weaknesses, and a clear, no-nonsense strategy for delivering value for shareholders. 

She’s done exactly what she said. Businesses in disparate geographies have been sold. A big chunk of the proceeds have been returned to shareholders. And the group is now focused on its core markets in the UK, Ireland and Canada where it has strong leadership positions. 

The board has set a clear dividend policy. Distributions of around £870m (31p a share) for 2022 and £915m (32.5p) a share for 2023, followed by annual low-to-mid single digit growth. 

Dividends are never guaranteed, but Blanc at the helm and a share price in the 430p region, yields of 7.2% this year, rising to 7.6% next year, make Aviva my top income stock for June. 

G A Chester does not own shares in Aviva

Legal & General

What it does: Legal & General is an insurance, pensions and financial services provider.  It is focussed on the UK market.

By Christopher Ruane. The financial services powerhouse Legal & General (LSE:LGEN) has a number of things going for it. Long term, I think demand for financial services should be robust. The large sums involved mean that the potential profits are big. Legal & General’s long-established track record and iconic logo help it bring in new customers and hang onto existing ones.

That has translated into an impressive dividend record. Dividends are not guaranteed and the company faces risks, such as a change to UK insurance renewal pricing rules hurting sales volumes or profit margins.

But the dividend is comfortably covered and the company has set out its aim of increasing it in coming years. Although that cannot be guaranteed, the progressive dividend policy could mean growing passive income in coming years. With a 6.9% yield, I see it as an attractive income pick for my portfolio.

Christopher Ruane does not own shares in Legal & General.

What are water shares?

A water stock simply refers to shares of a company whose business is closely tied to the water industry.

Supplying fresh water to homes and businesses is only part of the equation. There is also the issue of removal and treatment of wastewater.

Understanding what water stocks are all about is effectively understanding the water cycle.

Each water company pays the Environment Agency (in England) and Natural Resources Wales to collect water from reservoirs, rivers and underground aquifers in their locale. Groundwater and surface water treatment works clean the raw water, making it safe to drink. A network of pipes and enclosed storage reservoirs ensure clean water is available on demand. A network of sewers and pumping stations collect waste water, which is cleaned at sewage treatment works. Finally, the treated water is recycled back into the water system (for which a consent fee is payable to the regulator).

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UK regulatory framework for water stocks

If you are serious about investing in water shares, then an outline understanding of the regulatory environment will make you a smarter investor.

The water industry was privatised back in 1989. Today, a complex body of governmental agencies manage or influence the 11 water and sewerage undertakers in England and Wales (a separate company exists in Scotland).

The table below sets out the key regulators together with a brief resume of their role:

Top water stocks in the UK

Of the 11 regulated companies providing water and waste services in England and Wales, three are listed on the London Stock Exchange:

Severn Trent

Severn Trent has two business divisions. For the year ending 31 March 2021, its core regulated business earned revenues of £1.7bn. The vast majority of that revenue (98%) came from Severn Trent Water, with the remaining coming from Hafren Dyfrdwy. Profit before tax came in at £452m.

Outside of its two regulated water businesses, the company also runs a Business Services division. Operating throughout the UK, it generates renewable energy from various sources, including anaerobic digestion, crop, hydropower, wind turbines and solar technology. This much smaller business generated revenues of £135m and profit before tax of £24m for the same period.

Like all water companies, Severn Trent saw water usage being severely impacted by the Covid lockdowns. It saw a significant decline in non-household consumption, which was partially offset by higher domestic usage. Consequently, profit before tax was 17.1% lower than the previous year.

However, in its half-year results to November 2021, the company reported that consumption patterns have begun to return to pre-Covid levels. Consequently, revenues for this period were up 8% and profit before tax 10%.

Severn Trent’s dividend policy is to grow it year-on-year by at least CPIH (the ONS’s preferred measure of inflation) through to 2025. This is less generous than its previous policy of inflation plus 4%.

United Utilities

For similar reasons to Severn Trent, United Utilities’ revenue and profit were down 2.7% and 45% respectively for year ending 31 March 2021.

Throughout AMP7, the company is intending to accelerate its investment strategy to become a digital utility. Through its systems thinking approach, it wants to make better use of technology, automation and machine intelligence to drive operational and environmental performance. For example, it intends to install a total of 20,000 state-of-the-art sensors to its assets by summer 2022. This will enable it to improve, among other things, flood performance as well as gain greater insight into the whole-life of its assets.

As it has so far exceeded Ofwat’s customer outcome delivery incentives (ODIs), it has earned a bonus of £21m. This reward will be reflected in FY 2022/23. It has earmarked a cumulative outperformance payment of around £150m through to 2025.

United Utilities’ dividend policy is identical to that of Severn Trent.

Pennon

As the smallest of the three companies, Pennon is listed on the FTSE 250. However, it still faces similar challenges and opportunities to its two larger peers.

Two key milestones need to be mentioned in relation to this firm. Firstly, in 2020 it sold Viridor (a UK-wide waste management company) for £3.7bn to a private equity consortium. The £1.7bn profit it made from this sale was distributed to shareholders by way of a special dividend together with a share buyback programme.

Secondly, in June 2021 it bought all the issued share capital of Bristol Water for £400m. The deal is expected to add 16% to its regulatory capital value (a key metric used by Ofwat for setting price limits for every price review period) going forward.

Like its peers, Pennon has a progressive dividend policy, which will grow in line with CPIH plus 2% per annum through to 2025.

Are water stocks right for you?

In return for being a monopoly business, each water company is heavily regulated. Consequently, they each face similar challenges. It is important that you are aware of these before making any investment decision.

• Large debt on the balance sheet – The water industry involves huge capital outlays, often requiring planning decades in advance. Whilst interest rates have remained low, servicing the debt was not a problem. But with rising inflation, interest rates are starting to creep up. With some of this debt index-linked, that is likely to put a strain on their balance sheets in the following years.
• A tougher regulatory environment – Through 2020-25, Ofwat has rebased the tariffs each can charge under the price review and raised the bar with regard to performance targets. In their latest annual reports, each company highlighted that turnover had been impacted as a result.
• Bad debt – The Water Industry Act 1991 (as amended by the Water Industry Act 1999) prohibits the disconnection of a water supply and the limiting of supply as a means of enforcing the payment of an outstanding bill. This is a unique challenge for the industry. Although each company has a robust debt management strategy in place, with an unfolding cost of living crisis hitting many households, revenues could get squeezed in the following years.

To summarise, water shares are the classic defensive stock. During the Covid-19 crash of 2020, their share prices fell nowhere near as heavily as the wider index. They have reliable, highly visible income streams with a progressive dividend policy (although, of course, no dividend is ever guaranteed). As with any stock, water shares can be volatile. But as demand for water continues to increase, water stocks remain one of the most favoured shares amongst pension funds and income chasers alike.

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Corporations that appear to offer higher dividend yields than the rest of the market might come with more risk than their lower-yielding peers.

As such, when I am looking for passive income stocks to add to my portfolio, I search across the whole market. I do not exclude companies just because they do not offer market-beating dividend yields. 

And there is one company I am more interested in than any other blue-chip stock as a passive income investment today. 

FTSE 100 income stock

Severn Trent (LSE: SVT) is one of the UK’s largest and last remaining publicly-traded water providers. 

The provision of water and wastewater services is one of the most defensive markets around. Humans will always need to consume water, and cities will always need wastewater services. This essentially gives these businesses a captive market. 

The market is also highly regulated. This has benefits and drawbacks. On the one hand, regulators tightly control how much profit these water companies are allowed to make from consumers. That means they cannot just hike prices if they want to make more money.

On the other hand, the controlled nature of the market means new entrants cannot just start up overnight. A lot of capital and investment is required in order to take a new position in the market.

Even then there are no guarantees regulators will approve a new company’s pricing position. 

Passive income investment 

These are the reasons why I think this FTSE 100 firm is an excellent passive income investment today. Even though the stock only supports a dividend yield of 3.6% at the time of writing, this dividend payout is protected by the company’s competitive position in the market and its defensive nature.

The regulated nature of the market means the corporation can project its cash flows out over the next five to 10 years with a high level of certainty. This means management can try and set the dividend at a sustainable level without having to worry about future dividend cuts. 

That is not to say the dividend is 100% secure. There are always going to be risks the company will have to deal with. For example, rising interest rates could increase the cost of its debt, which could force management to reduce the payout and free up more cash to pay to creditors. 

Despite this, I would acquire Severn Trent for my portfolio, considering its income credentials. As a passive income investment, I think the group has some of the best qualities in the FTSE 100. I think it is highly likely the company will still be paying a dividend to investors 10 years from now. 

A resilient FTSE 100 dividend stock

First up is Severn Trent (LSE:SVT). The UK-based utilities company provides water and waste services to millions. It has some operations abroad as well. Over the past year the share price is only up around 3%, but the main focus for me is the fact that it’s a dividend stock. 

The dividend yield is currently above the FTSE 100 average at 4.1%. More than this, due to the performance of the company, I think it’s sustainable going forward.

Half-year results through to the end of September 2020 showed good resilience despite the pandemic. Revenue was down 2.5%, largely due to the decrease in metered revenue. Even though profit took more of a hit, the interim dividend per share of 40.63p was still confirmed.

This is because the company “recognises the critical role that dividends play in providing necessary income for pensioners and savers”. It has good liquidity, and £890m of unutilized facilities that it could call on, making the outlook for the company robust in my opinion.

A risk could be that the bad debt provisions set aside could spiral higher and be a drag on the company. An additional £8.2m of bad debt charges was recorded in the half-year report. This is something I’d want to keep my eye on with this FTSE 100 dividend stock.

A well-run investment manager

The second FTSE 100 dividend stock that I think is sustainable for the future is Schroders (LSE:SDR). The dividend yield currently offered is 3.23%. This might just beat the average in the index, but I think the fact that the dividend is robust makes up for this.

Schroders is a large investment manager, and so has to meet capital requirements from the regulators. As an investor, I see this as a positive, almost as if the business financials are being overseen by a third party.

The company primarily makes money based on the amount of assets held under management. In the 2020 financial year, assets under management increased 15% to reach a record high of £574.4bn. But higher operating costs meant that profit after tax was broadly the same as the previous year.

Good profits and good liquidity make me think that a dividend will continue to be paid to shareholders going forward. Over the past 10 years, the dividend yield for this FTSE 100 stock has averaged around the 3% mark.

One potential risk I see is the expansion of services in China that is being pushed. Given the nature of the Chinese system, I think Schroders needs to be careful here, as many companies that have tried to crack the Chinese market have come away licking their wounds.

I reckon if a company has managed to navigate the pandemic and keep its dividend intact, it’s a great sign. With that in mind, here are two FTSE 100 dividend stocks I’m eyeing up right now. 

FTSE 100 dividend stocks

United Utilities (LSE: UU) is the first company on my list. This water business has been a dividend stalwart for some time. I think this is going to continue. 

The supply and disposal of water is one of the most defensive industries you can get. In the UK, this industry is highly regulated. That’s both a benefit and a drawback for companies like United.

It’s a benefit because it’s challenging for new companies to break into the sector. On the other hand, regulators control the billing system. This means United can’t make excessive profits. 

As such, the company may not be the most prosperous FTSE 100 dividend stock. Nevertheless, I think its dividend is exceptionally sustainable. In my opinion, that’s what matters. Investors can buy the stock safe in the knowledge it will still be distributing profits 10 years from now. 

At the time of writing, shares in the utility provider support a dividend yield of 4.5%. That looks extremely attractive to me in the current interest rate environment.

Takeover potential

Severn Trent (LSE: SVT) exhibits similar qualities to United. This is one of the reasons why I believe this company is one of the best FTSE 100 dividend stocks to buy now. 

Severn’s business model is a bit more profitable and efficient than its peer. That’s why the business has historically traded at a premium. It’s also been subject to several takeover rumours in the past. 

None of these rumours has materialised into concrete action, but there’s still time. Severn is a profitable, predictable business, which could fit nicely into another conglomerate or Sovereign Wealth fund. 

In the meantime, the stock supports the dividend yield of just over 4%. 

Recently, investor sentiment towards the business has deteriorated as analysts have become concerned about regulator plans for the sector. As mentioned above, I’m not too worried about these threats. The regulator may decide to reduce the amount of profit water companies are allowed to earn, but that won’t remove their defensive qualities. Severn will remain one of the UK’s most crucial water groups. 

Therefore, I’m interested in buying this company as a part of a diversified basket of FTSE 100 dividend stocks. Combined with other defensive income investments, I reckon Severn and Untied can provide investors with a steady income stream for many years to come, just as they’ve done in 2020. 

Why Severn Trent is a dividend share I’d buy

In the trading year to March 2015, the total shareholder dividend was worth just under 85p per share. And for 2022, City analysts have pencilled in a total shareholder payment of almost 103p. I admit growth like that isn’t earth-shattering. But it’s steady. In fact, Severn Trent hasn’t missed a dividend raise in its five-year record.

And it isn’t forecast to break that impressive run of dividend-raising this year either. Even though the pandemic has wreaked havoc on many other businesses. Indeed, taking the five-year dividend record and including the forecasts for two years ahead, the compound annual growth rate of the dividend runs at about 3.3%.

But Severn Trent hasn’t been immune to the effects of the pandemic. Today’s half-year results report covering the period to 30 September reveals that turnover slipped back by 2.5% year-on-year, “largely driven by Covid-19 related decrease in metered revenue.”

And underlying earnings plunged by just over 25% in the period. However, it’s clear the directors view the setback as temporary because they pushed up the interim dividend by 1.5%, thus continuing the upward trend.

Indeed, the headline for today’s announcement reads: “Resilient financials, strong operational performance, continued investment and performance culture delivers strong operational performance.”

The report goes on to list some of the firm’s achievements and performance indicators. But the item that caught my eye is that capital investment is set to exceed £500m for the year “including accelerated activity on strategic renewable projects.”

Juggling shareholder and debtholder payments

There’s no denying that operating a regulated water supply and wastewater removal business is a capital-intensive operation. One of the constants of the enterprise is the need for regular, chunky investments of capital. And the company uses the money to maintain, upgrade and expand its water supply infrastructure and customer services. And there’s no dodging the outlay. Often, such investments must be undertaken to comply with regulatory requirements.

One of the consequences is that Severn Trent carries a big debt-load. And I can get a quick feel for that by comparing the firm’s market capitalisation of £5.87bn with its enterprise value of £12.25bn. The difference between the two figures is essentially net debt.

Of course, high debts are a ‘thing’ in most utility-style companies. But it does mean the directors need to juggle the cash flow to satisfy both debt providers’ interest payments and shareholder dividend payments. And if the debt becomes too large, shareholders may see their dividend payments reduced.

However, there’s no sign of that happening on the horizon. And I’m confident the company can keep paying, and modestly growing, its shareholder dividends in the years ahead. So, for me, Severn Trent is a good, defensive candidate for a long-term hold in my portfolio.

As tempted as I was to write about them earlier, it just seemed too soon to get bullish. We were still in the midst of a pandemic, the economy was looking horrible and business had just tentatively picked up. However, now with hopes of a vaccine, robust economic growth in the UK and improving performance in some pockets of the economy; I think it’s a good time to reconsider FTSE 100 stocks that can earn big dividends. 

FTSE 100 stock with stable dividends

One stock I like is the FTSE 100 water supply and sewerage services provider, Severn Trent (LSE: SVT). Its dividend yield is just below 4%. This isn’t anywhere near the biggest dividend payouts. But it’s not among the lowest either. Moreover, it also appears to be quite safe. The service SVT provides is so key, its demand isn’t about to fall off a cliff. That’s more than I can say for many other FTSE 100 companies, some of which I hold in my own portfolio. 

The one note of caution on SVT is about its performance this year. We don’t have an update on SVT’s performance since its July update, where it flagged a hit to revenues and potentially higher bad debts. We will know more when it updates information later this month. Even in these challenging times, however, I’m optimistic that SVT will continue to pay dividends given its past history of paying them and the renewed optimism for 2021.

I also like SVT because it’s not just a dividend stock. On average, in 2020 its share price has risen 18% from 2019. In fact, even from the last time I wrote about it in May this year, its share price is up almost 5%. This can be a much bigger gain than buying a high-dividend yield share, when the share price is falling. I do realise that in the year of the bear, it was to be expected. Investors were going to buy shares in safe companies, and SVT is one of them. But, I’m encouraged by the fact that its share price has already bounced back after seeing a short spell of decline recently.  

Another option to consider

In the same vein, I like another utility stock, National Grid, too. It actually has a higher dividend yield of around 5.2% today. But, the reason I wrote about SVT and not NG is that there’s been too much negative news flow about it in recent months. This includes an expected earnings decline, potential issues with power supply, and even the possibility that it may be absolved of its role as the electricity system operator. I’m sticking with SVT as a good dividend stock for now. 

An ideal share to hold through any future stock market crash

Severn Trent (LSE: SVT) is a company I’ve long admired and watched. As a utility company, it’s a steady FTSE 100 dividend share. Investors can expect income in all economic conditions, even in the steepest stock market crash.

On top of that, the company has good visibility of earnings as these are regulated by Ofwat. This means it can forecast earnings accurately and plan expenditure. The lack of surprises makes it a share that I think is worth owning. 

The pandemic is costing Severn Trent money, up to £85m worth of revenue this financial year. However, the utility company will be allowed to recoup this in 2022–23. The group is also confident of its ability to earn outperformance targets set by the regulator, which will be a boost.

Providing a dividend yield of just over 4% – based on its current share price at the time of writing – I think Severn Trent makes for an ideal FTSE 100 dividend share.

A company that is beefing up through the pandemic

RELX (LSE: REL) is a lower-yielding FTSE 100 dividend share. It’s a data, subscriptions, and events business all rolled into one and it’s the latter that has hit its share price this year as large gatherings are cancelled. However, events are only 16% of group revenue, so I think the share price fall is overdone. The shares have fallen by 10% so far this year.

The company has been on a buying spree over the last 12 months. It has spent nearly £1bn on a range of acquisitions. The pandemic has created opportunities for it to buy struggling smaller companies at reduced prices, while also giving it more data and analytics power. These are likely to be growth markets both in the near term and for a long time into the future.

It’s a share the veteran buy-and-hold investor, Nick Train, holds in his UK Equity fund. It’s dependable and steady, and I think in uncertain times this is a very welcome characteristic. Especially if there’s a stock market crash.

RELX isn’t a high-yielding stock, at 2.7%. What there is though, is the potential for share price growth, as well as dividend growth. This makes it a great FTSE 100 dividend share in my view. It’s a stock I’d be happy to buy and hold and to own through any future stock market crash.