Chin up, though. Britain’s elite share index is packed with stocks that should keep paying inflation-busting dividends in the near term and beyond, like the three outlined here.

A right royal beauty

Royal Mail (LSE: RMG) is not having the best of it, the effects of a cooling UK economy exacerbating the structural decline in the letters market, as seen from the 6% decline in the company’s letters volumes in the quarter to July 24.

This doesn’t deter me, however. I am really excited by the rate at which parcels volumes continue to grow (up 7% in the UK at Royal Mail during the last quarter) and are likely to continue doing so as online shopping goes from strength to strength.

I am really excited by the prospect of exploding revenues in Europe, in particular. At its GLS division on the continent, volumes jumped 10% in Q1, and Royal Mail is still expanding here to boost future business levels.

Right now, Britain’s oldest courier can be picked up on a forward P/E ratio of 12.2 times. This, allied with a bulky 5.4% dividend yield, makes it an unmissable buy right now.

A sparky selection

National Grid (LSE: NG) is another Footsie-listed share you can rely on to make you a mint by the time you retire.

The company, which maintains Britain’s power transmission grid (as well as in some parts of the eastern seaboard of the US), is not immune to regulatory problems of course, but the risks are not as high as for the likes of Centrica and SSE which are beset with claims of ripping off their customers.

In fact, National Grid got some good news from Ofgem today when it confirmed that it will keep the cost of equity range of between 3% and 5% in the five years from April 2021, providing the business with great visibility over the medium-to-long term.

The high costs of keeping the country’s lights on creates the odd moment of earnings turbulence, but National Grid can largely be banked on to provide decent returns owing to the essential nature of its services. A prospective P/E ratio of 14.3 times makes it a steal considering these qualities, while a juicy 5.8% dividend yield adds a pretty tasty cherry on top.

Build a fortune for your retirement

I’m convinced that Persimmon (LSE: PSN) should also provide you with brilliant returns by the time you come to hang up your work gloves.

The fallout of the 2016 European Union referendum may mean that the rampant house price growth of yesteryear may now be nothing but a mere fossil. However, given successive governments’ failures to build the houses that the country desperately requires, I am not expecting the homes shortage to be solved any time soon. The supply/demand imbalance is here to stay, keeping demand for new-build properties like those of Persimmon bubbling over.

City analysts certainly aren’t expecting profits growth to cease at Persimmon, meaning that it can be picked up on a forward P/E ratio of just 9.1 times. Throw a bumper 9.5% dividend yield into the equation and I reckon the builder is a great share to buy now and to hold for your autumn years.

National Grid Is Undervalued 

NG’s revenues are likely to rise slightly above inflation into 2018, but a 25% operating margin will likely yield an underlying operating performance of between £4bn and £4.2bn over the period, which means that net leverage at about 4.4x should not pose any problems. Rising cash flows will likely continue to support a rich dividend policy — so, in my view, its forward dividend yield (north of 5%) is safe.

For all this, at 857p a share you are paying only 14x for NG’s forward net earnings, which is not much in a sector that is highly regulated and where cash flows are highly predictable. 

NG’s stock price is down 5% this year and is flat over the last 12 months, but it could be argued that NG’s prospects and earnings profile could be boosted by more difficult trading conditions at some of its smaller domestic rivals, which are financially weaker, over the next couple of years. 

Petrofac Promises More Upside

Petrofac’s stock price has been volatile in recent times — unavoidable due to recent oil price swings — but I think investors may have overreacted.

Its latest set of numbers showed that the oil services group is adapting well to the new environment, and while it’s true that with Petrofac you’d add more volatility to your portfolio than with National Grid, its earnings growth projections are much more appealing, yielding a forward net earning multiple of 17x that drops to around 8x in 2016 and 2017. 

Its forward dividend yield at 4.7% signals more risk than that of National Grid, but Petrofac’s margins will likely expand over the next couple of years even if Brent oil doesn’t surge to its previous highs. Finally, consider that if bullish analysts are right, upside could be between 20% and 70% from its current level, while downside could be limited (in the region of 3%), at least according to market consensus estimates from Thomson Reuters. 

Admiral & Regulatory Risk 

“Car and home insurance premiums are set to increase due to an upcoming increase in the UK’s insurance premium tax, the AA said on Tuesday,” Alliance News reported today.

Elsewhere, the BBC also noted that, based on the AA’s survey, car insurance premiums “have risen for the first time for nearly three years, with young drivers facing the biggest increases” at about 6% in the three months to the end of June.

As a result, Admiral stock was up 5% at the time of writing. Today’s news is precisely the reason why I would not invest in Admiral and in similar insurers — in short, regulatory risk is incredibly hard to model.

Furthermore, based on cash flows and earnings, Admiral’s trading multiples are broadly in line with those of National Grid, but its operating cash flow/dividend ratio is much lower, which signals plenty of risk for a dividend yield that is projected at 6% over the next 30 months. 

The problems facing many utility companies are not limited to higher interest rates, as water companies are seeing their returns cut by recent regulatory reviews, electricity generators are feeling the squeeze of lower wholesale electricity prices on their margins and energy suppliers are witnessing a rise in competition from smaller competitors. With these underlying trends, investors need to be more selective in the sector to choose companies that have assets that are coping better than others.

Centrica

Centrica‘s (LSE: CNA) adjusted operating profit fell 35% to £1.75 billion, as lower oil prices crushed its upstream profits. Compounding these problems, supply margins and customer numbers have decreased, as consumers have become more price-conscious and are more willing to switch energy suppliers.

Last week, it promised to cut household gas prices by 5%, which makes it the cheapest of the big six utility companies; but will that reverse the decline in profitability, or could it threaten to start a price war that has been seen in the supermarket sector?

In hindsight, Centrica’s upstream diversification now seems to be a mistake. The downstream assets, which generate more stable cash flows, would most likely trade at a much higher valuation than Centrica as a whole.

As a break-up is unlikely, Centrica’s shares are unattractive. They trades at a forward P/E of 15.6, and has a forward yield of 4.3%.

National Grid

National Grid (LSE: NG) is relatively more attractive than Centrica, because an overwhelming majority of its earnings is derived from regulated assets. The income from these assets are typically very stable and not dependent on fluctuations in demand nor changes with wholesale prices.

Its shares currently have a forward P/E of 14.7. Its dividend should grow by at least RPI inflation, and has an indicative dividend yield of 5.1%. With a higher than average dividend yield in the sector, and greater foreseeability over earnings in the medium term, National Grid is probably the most attractive in the sector.

Drax

Drax (LSE: DRX) will be hit hard by the recent changes in the Climate Change Levy, which will now include biomass electricity generation in the levy from 1 August 2015. The power generator, which has been switching from burning coal to wood pellets, expects the change would cost it £30 million this year and £60 million in 2016.

Unless the government delays the changes or makes a policy U-turn, shares in Drax are unappealing.

Pennon Group

Pennon Group (LSE: PNN) had completed its regulatory review of its water utility business in 2014, which gives it greater certainty over cash flows in the next few years and allows it to commit to dividend growth of 4% above RPI inflation until 2019/20. By contrast, United Utilities (LSE: UU) and Severn Trent (LSE: SVT) have only promised dividends will grow at least in line with RPI inflation.

As is typical of other water companies, Pennon’s dividend yield of 3.9% is relatively low. Although the utility company has a more attractive dividend growth plan than the other listed water companies, a high P/E valuation and relatively low dividend yield should mean Pennon’s shares could be hard hit by increases in interest rates.

This is the second time in six months that British Gas has passed cost savings on to customers as part of the company’s initiative to improve customer service. 

British Gas’ new CEO Mark Hodges has built his reputation on an ability to improve customer service, and this round of price cuts will go a long way to improving customer relations. 

Improving relations

British Gas now offers the cheapest standard electricity prices of all the large suppliers across nearly 90% of the country. What’s more, the company is rolling out a number of devices, such as Hive Active Heating controls and smart meters to help consumers reduce energy consumption. 

However, it remains to be seen if these initiatives will convince new customers to give British Gas a try. Customer numbers were broadly unchanged at around 14.8m during the first three months of this year after the first round of price cuts.

Centrica needs to ignite growth at British Gas before the group can mount a full recovery.

Indeed, income from British Gas accounts for the majority of the Centrica group’s income. Last year, after the average householder energy bill dropped by £100 due to warmer weather, Centrica’s overall profit contracted by 35%. 

Unfortunately, it’s unlikely that this move to cut prices will return British Gas and Centrica to growth. Centrica is struggling, and it’s not just the British Gas arm that’s holding the group back. 

Review underway

Centrica’s management is currently conducting a strategic review of the group’s operations, which, when complete, is expected to outline hundreds of millions of pounds in cost savings as well as a plan to boost Centrica’s credit rating. 

It’s likely that the axe will fall on Centrica’s North Sea gas fields first as part of the restructuring. Selling off these assets will help the company clean up its debt-laden balance sheet and curb capital spending. Management has already announced that it is curbing capital spending on North Sea projects by around 40%, to £800m this year. A further cut to £600m is expected next year.

Overall, it’s clear that Centrica is in crisis mode and for defensive, income-seeking investors, SSE (LSE: SSE) is the better pick by far. 

Steady growth 

SSE has proven over the past decades that it is, broadly speaking, a stronger company than Centrica. 

For the past five years, SSE’s revenue has grown at compound annual growth rate of around 8% per annum. However, margins have come under pressure, and earnings per share have slipped by 10% since 2011.

On the other hand, over the past five years Centrica’s revenue has increased by 31% but EPS have declined by 30%. 

Further, since 2011, after including dividends, SSE’s shares have returned 60% for investors. Centrica’s shares have lost 5%, even after including dividends. 

According to City forecasts, Centrica’s dividend yield will total 4.4% this year while SSE’s yield will come in at 5.6%. 

As part of these changes, renewable energy companies will no longer be exempt from the levy. Currently, tax is not paid on renewable electricity generated under renewable source contracts, regardless of whether it is generated in the UK or abroad.

Drax is in the process of converting the UK’s largest coal power station into a plant designed to burn wood pellets, which are considered a renewable fuel.

So, the company stands to lose a sizable amount of income following this change. 

Latest setback

Unfortunately, this is just the latest in a string of setbacks for Drax. Indeed, during the past few years, the company has issued a series of profit warnings, net profit has fallen by 31% since 2010 and the group’s long-term debt has tripled. 

But what’s more concerning is the fact that Drax’s return on assets has collapsed during the past five years. 

Falling returns 

Return on invested capital is a key metric for measuring business efficiency. The figure gives a great indication of how well a company is using its money to generate returns. And the most efficient businesses, with the highest ROIC figures, are usually the best long-term investments. 

For example, National Grid’s (LSE: NG) ROIC has remained steady at around 7% per year since 2011. Over the same period, shareholder equity has expanded by 33%, and book value per share has grown at a compound annual growth rate of 13.5% per annum since 2010.

In other words, National Grid has been creating a significant amount of value for investors. It’s little wonder that the company’s shares have produced a total return of 15.8% per annum since 2010. 

Over the same period, Drax’s ROIC has slumped from a high of 29.4% to a low of 3.9%. Book value per share has increased at a compound annual growth rate of around 2% per annum since 2011.

So, it should come as no surprise that Drax’s shares have produced a total return of -0.6% per annum for the past five years. 

Unlikely to improve

Drax’s fortunes are unlikely to improve anytime soon. Estimates vary, but figures suggest that due to the tax changes announced yesterday, Drax’s earnings before interest, tax, amortization and depreciation could be lower by £30m this year, and £60m during 2016.

Analysts were expecting the company to report EBITDA of £193m for 2015. After factoring in the reduction of £30m, Drax’s EBITDA is now set to fall to £163m this year, 29% below last year’s reported figure. On the other hand, National Grid’s EBITDA is set to march steadily higher by around 3.5% per annum for the next three years. 

National Grid currently supports a dividend yield of 5.3%, and the payout is covered one-and-a-half times by earnings per share. City analysts expect Drax to cut its dividend payout by 40% this year, which will leave the company supporting a yield of 2%. 

Foolish summary 

Overall, National Grid looks to be a better investment than Drax. 

National Grid

National Grid runs Britain’s essential gas and electricity networks. Regulators set the company’s investment, pricing and returns parameters for long periods ahead. This gives management good visibility on the future, enabling long-term planning, and making for a very stable business. The company also has some geographical diversification, with energy businesses in the northeastern US.

As a lower-risk equity investment, National Grid is ideal for a core blue-chip holding in a shares portfolio. What’s more, now could be a good time to buy, because the shares are trading not far off their 52-week low and some 14% below their high.

Analyst forecasts put National Grid on a 12-month forward price-to-earnings (P/E) ratio of 14.1, with a prospective dividend yield of 5.3%. The P/E is in line with the FTSE 100 long-term average, which is a generous rating for a stable, premium business. The yield is also generous, particularly as it comes with a boardroom policy to increase the dividend each year at least in line with RPI inflation for the foreseeable future.

Jersey Electricity

Jersey Electricity was founded in 1924 and floated on the London stock market in 1964. The company is the sole supplier of electricity in Jersey, via interconnectors from France and some on-island generation. The company also runs the Channel Islands Electricity Grid in partnership with Guernsey Electricity.

Jersey Electricity is 62%-owned by the States of Jersey (the government), but the company is largely left to get on with the business of balancing the needs of the island and shareholders. Shareholders have seen an annualised total return (capital and dividends) of 10.1% over the past 10 years, which is ahead of National Grid’s 9.5%.

Although a smaller company than National Grid, Jersey Electricity nevertheless enjoys a low-risk monopoly position in its territory. The shares are currently trading at an all-time high, giving a forward P/E of 16.2 and a yield of 3%. While long-term investors could still see a decent return from current levels, I would be tempted to wait/hope for a dip in the price to add some useful satellite geographical diversification to a core National Grid shareholding.

OPG Power Ventures

OPG Power Ventures joined London’s junior AIM market in 2008. The company was founded to develop and operate power plants in India, after a 2003 liberalising act of parliament opened up the industry to private investment for the first time since 1948.

OPG has delivered compound annual earnings growth of over 40% over the last three years, and analysts have pencilled in more of the same for the next two years. More importantly, after heavy investment, OPG has now built sufficient scale to start generating cash flows (and dividends), which means the company is a less risky investment than in the early days — although this rupee-earner is by no means low risk.

Nevertheless, a small investment in the company would add geographical diversification and a bit of spicy growth potential to the power sector of an investor’s portfolio. A current-year forecast P/E of 14.8 falls to 10.3 next year, giving very attractive price-to-earnings growth (PEG) readouts of 0.3 and 0.2. Dividends could also grow fast from a symbolic maiden payout expected this year.

One such company is food supplier, Cranswick (LSE: CWK). It is a very steady business which supplies mainly meat to supermarkets in the UK, while also having its own brands of sausages and other meat products. And, with demand for such products unlikely to change significantly whether or not Greece remains in the Euro, Cranswick offers a consistency that few other companies can match. For example, in the last five years it has been able to increase its earnings in each and every year.

Looking ahead, Cranswick’s bottom line is expected to increase by 6% in each of the next two years. And, while this is in-line with the expected growth rate of the wider index, the chances of Cranswick meeting its guidance are arguably higher than for the wider market, since Cranswick is far less cyclical and is has a much more dependable business model. Therefore, its price to earnings (P/E) ratio of 16.3 indicates good value, with there being scope for an upward rerating moving forward.

Meanwhile, the likes of National Grid (LSE: NG) (NYSE: NGG.US) and Pennon (LSE: PNN) also have very defensive business models. In fact, like Cranswick, demand for electricity and water is very unlikely to change in the wake of problems in the Euro or any other region in the world. As such, their bottom lines are unlikely to come under any significant pressure, which increases their appeal at an uncertain time.

Of course, National Grid’s future earnings growth rate is not particularly brisk, with the company expected to see its bottom line rise by just 3% next year. However, it offers a yield of 5.3% and a P/E ratio of 14.1, which indicate that an upward rerating plus generous income return should equate to an impressive total return over the medium to long term. And, while Pennon’s scope for an upward rerating is somewhat limited, owing to its P/E ratio of 20.5, it is expected to grow its net profit by 9% next year, which is ahead of the wider index’s growth rate and seems to justify a generous rating.

In addition to the above, all three stocks have low betas, with Cranswick’s being 0.5, National Grid’s being 0.9 and Pennon having a beta of 0.7. As a result their share price movements should be less volatile than those of the FTSE 100 which, when combined with their consistent outlook and appealing valuations, makes Cranswick, National Grid and Pennon great options to defend your portfolio against the challenges that lie ahead.

BAE Systems

Weapons builder BAE Systems (LSE: BA) has endured a torrid time during the past four weeks and has seen shares slide 9% during the period. In my opinion, this provides a prime buying opportunity as the defence industry is in ruder health than it has been since the 2008/2009 financial crisis rocked government budgets — order books across the industry are back on the mend, and BAE Systems announced in mid-May that it is “making good progress” so far in 2015.

And with good reason: the company’s cutting-edge technology has made it a favourite with Western governments for many years, and the firm’s hardware is attracting increasing attention from tasty emerging regions. Accordingly the City expects BAE Systems to bounce back from 2014’s 10% earnings slip with advances of 3% and 7% in 2015 and 2016 correspondingly, projections that create very decent P/E multiples of 12 times and 11.3 times.

With the defence sector finally looking up, I believe investors can also be confident of flowing dividend growth in the coming years. Indeed, BAE Systems is anticipated to raise last year’s payment of 20.5p per share to 20.8p this year, and again to 21.6p in 2016. Consequently the arms builder carries juicy yields of 4.4% and 4.5% for this year and next.

Weir Group

Like BAE Systems, specialised pump builder Weir (LSE: WEIR) has seen its share price dip markedly since mid-May, the stock having conceded some 9.5%. But unlike its FTSE peer, I believe that investors should steer clear of the Scottish business as continued weakness in the mining and oil sectors threatens to keep revenues under pressure.

Indeed, Weir announced during the period that order intake at its Oil & Gas division tanked 34% during the first five months of 2015. With pressured commodity prices likely to restrain capex across the resources sectors, the number crunchers expect Weir to suffer a colossal 31% earnings dip this year, leaving Weir dealing on a P/E multiple of 18.4 times — I would consider a reading closer to the bargain barometer of 10 times to be a fairer reflection of the risks facing the business.

Despite these problems, the engineer is predicted to keep its progressive dividend programme rolling, and a payout of 45.3p per share is currently slated for 2015, up from 44p last year. But given that Weir’s net debt continues to edge higher — this came in at a huge £861m as of the close of 2014 — I believe that even an underwhelming yield of 2.7% could be deemed optimistic.

National Grid

I am far more bullish on the investment prospects of network operator National Grid (LSE: NG), however, with the company’s vertically-integrated model providing terrific earnings visibility. Still, the market has failed to share my enthusiasm in recent weeks, and the stock was recently dealing 7.9% lower from levels punched during the middle of May.

Investors failed to get excited about National Grid’s results for the year concluding March 2015, which showed RIIO cost-cutting initiatives help push operating profit at the firm 5% higher to £3.9bn. With the business also embarking on a huge asset building and improvement scheme in both the UK and US, City analysts expect the bottom line to remain resilient — earnings growth of 1% and 2% are chalked in for 2016 and 2017 respectively, leaving the power play dealing on decent P/E ratios of 14.7 times and 14.3 times.

And National Grid’s strong cash flows are expected to keep dividends charging higher, too. Last year’s 42.87p-per-share reward is expected to rise to 44.1p in the current period, yielding an impressive 5.1%. And this moves to 5.3% amid expectations of a 45.2p payout.

For long term investors, though, the focus is on buying quality stocks at a fair price. And, on this front, there are a number of options available. For example, National Grid (LSE: NG) (NYSE: NGG.US) remains a top quality income stock with considerable defensive appeal. For example, it has a yield of 5.2% and a beta of 0.9, which means that its shares should be less volatile in terms of their price movements than the FTSE 100.

Furthermore, National Grid offers a relatively consistent earnings outlook and, as such, is a useful ally to have in a portfolio when the future is uncertain. And, with it having a price to earnings (P/E) ratio of 14.5, it offers very good value for money when you consider that a number of its utility sector peers trade on P/Es of over 20 and yield less than 4%.

Of course, another very defensive and consistent stock is Smith & Nephew (LSE: SN) (NYSE: SNN.US). The medical devices company has grown its bottom line in each of the last five years and, over the next two years, is set to continue this trend with increases in its earnings of 1% this year and 13% next year. And, unlike its pharmaceutical peers, demand for Smith & Nephew’s products is not subject to the ‘boom and bust’ cycle, whereby the loss of patents hurts its top and bottom lines to a great extent. This means that, in the long run, it should be a relatively stable stock and, as such, it trades on a rather high P/E ratio of 20.7, but still has huge appeal at the present time.

Meanwhile, one stock that seems to offer the perfect mix of growth, value and income prospects is Taylor Wimpey (LSE: TW). The house builder has seen its bottom line grow by over five times from 2011 to 2014 and, in the next two years, it is set to grow by a further 50% as a loose monetary policy increases demand for property at a time when there is a chronic undersupply in the market.

Furthermore, Taylor Wimpey also offers stunning income prospects. It currently yields 4.8% and, with such strong profit growth being forecast, it is likely that its shareholder payouts will increase at a rapid rate. As such, its yield could easily surpass that of National Grid over the medium term, while its share price could also move upwards due the scope for an upward rerating. In fact, Taylor Wimpey trades on a P/E ratio of just 12.9 which, given its excellent growth prospects, is very difficult to justify.

Therefore, while National Grid and Smith & Nephew are great stocks that are worth buying, Taylor Wimpey’s mix of growth, value and income potential mark it out as a superb opportunity for long term investors.

And, only a few months after this tidal wave of bad news was announced, Centrica’s management warned that further losses could be on the horizon. Centrica’s oil & gas production arm is struggling to remain profitable with commodity prices at present levels.

Taking action

All of the factors above have hit Centrica’s shares hard. Over the past 12 months, Centrica has lagged the FTSE 100 by around 12%, excluding dividends. 

However, the company is now gearing up to unveil a new restructuring plan. The plan will be based on the results of a strategic review conducted by Centrica’s new CEO, Iain Conn. 

It’s expected that the new plan will outline hundreds of millions of pounds in cost savings and help Centrica return to growth. 

Turnaround plan

Centrica’s troubles can be traced to three key factors. Firstly, the company’s reputation took a hit from the political row over gas bills. Then, the sector was subject to a competition probe. 

Finally, early this year, steep falls in oil & gas prices forced the company to write down the value of production assets and take a pre-tax loss of £1.4bn for 2014. 

It’s likely that the axe will fall on Centrica’s North Sea gas fields first as part of the restructuring. Management has already announced that it is curbing capital spending on North Sea projects by around 40%, to £800m this year. A further cut to £600m is expected next year.

Asset sales could also be on the cards as Centrica looks to improve profit margins.

Paying down debt

In total, reduced capital spending combined with lower operational costs and the take-up of a scrip dividend will save Centrica around £1bn — a much-needed infusion of cash. 

With this additional cash, Centrica’s top priority will be debt reduction.

Centrica’s debt-to-equity ratio has jumped from 1.1 at the end of fiscal 2013, to 2.3 at the end of fiscal 2014. 

Nowadays it is common for utilities to have high levels of debt. Nevertheless, a debt-to-equity ratio of 2.3 is concerning. SSE’s net-debt-to-equity ratio, for example, stands at around 1.3.

A long way to go

There’s no denying that Centrica’s turnaround will take time. Management will have to act quickly to turn the company’s fortunes around and rebuild the trust of shareholders. 

So overall, Centrica is a recovery plan, which is an unusual position for a utility to be in. 

Indeed, utilities are not usually recovery plays. Companies like Centrica and National Grid (LSE: NG) should be defensive dividend stalwarts that act as a solid backbone to build your portfolio around.

Steady growth 

National Grid has proven over the past decades that it is, broadly speaking, a stronger company than Centrica. 

For the past five years, National Grid’s revenue has grown at a steady rate of around 1% per annum. Costs have held steady, and net income has jumped by 81% since 2010.

On the other hand, over the past five years Centrica’s revenue has increased by 31% but net income has more than halved over the period. 

What’s more, since 2011, after including dividends, National Grid’s shares have returned 105% for investors. Centrica’s shares have lost 5%, even after including dividends. 

The bottom line

All in all, choosing between National Grid and Centrica comes down to your own personal risk profile. 

If it’s stability you’re after, National Grid is the best pick. However, if you’re willing to take on some risk in exchange for increased reward, Centrica could be a better pick.