Are Centrica PLC, SSE PLC And Severn Trent Plc's Dividends Too Good To Be True?
At 6%, SSE(LSE: SSE) is one of the highest yielding stocks in the FTSE 100. As a result, it has become increasingly popular among investors seeking to overcome the continued low rate of interest in the UK. And with it being 5.5% higher than inflation, SSE offers a superb real return at the present time.
Clearly, such a high yield can indicate that a dividend cut is just around the corner. However, SSE's dividend appears to be very secure and able to grow by at least as much as inflation over the medium term. Evidence of this can be seen in the company's dividend coverage ratio of 1.25, which indicates that SSE's dividend could move higher and still allow for sufficient reinvestment in the business.
Furthermore, with SSE trading on a price-to-earnings (P/E) ratio of 13.4, it appears to offer upward rerating potential to add to the exceptionally enticing income return.
Also offering bright dividend prospects is Centrica(LSE: CNA). Although it cut its dividend by around 30% as part of a new strategy to pivot towards domestic energy supply and away from oil and gas exploration, Centrica still yields a very impressive 5.2%. And while its financial performance has been severely hurt by the decline in the price of oil, its dividend is covered 1.25 times by profit.
Looking ahead, Centrica has the potential to raise dividends at a brisk pace, owing to its new strategy. This should see it deliver annualised cost savings of £500m over the next few years and with domestic energy supply being a more robust space than the resources industry, the company's shareholder payouts are likely to be more resilient too. As with SSE, Centrica seems to offer good value for money right now, with the company's shares trading on a P/E ratio of 15.4 and offering positive earnings growth forecasts for next year.
Stability and strength
Meanwhile, Severn Trent(LSE: SVT) remains a top-notch income play. While its yield of 3.7% may be considerably lower than those of SSE and Centrica, its earnings outlook is arguably more stable than its two utility peers. That's at least partly because the provision of water is far less politicised than is the case for domestic energy, so Severn Trent faces far less political risk than the likes of SSE and Centrica.
Furthermore, Severn Trent's dividend is well-covered at 1.2 times and with the company having increased it at an annualised rate of 3.2% during the last five years, the prospects for future dividend rises seem to be bright. Certainly, the liberalisation of the water services market is a potential cloud on the horizon, but with Severn Trent still being a potential takeover target, its total returns could be very impressive in the long run.
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Peter Stephens owns shares of Centrica, Severn Trent, and SSE. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.