The FTSE 100 is packed full of top income stocks and I’m looking to add a couple more to my portfolio.
I’ve a spread of dividend shares, including Lloyds Banking Group, Legal & General Group and M&G. Clearly, I’m too heavily concentrated in the financial sector and need to spread my wings. So I decided to size up a couple of utilities instead.
United Utilities Group (LSE: UU) jumped out at me. As a regulated water utility company, United Utilities has predictable earnings due to consistent demand for water services. This should help fund a stable yet growing stream of second income.
Should I buy?
The stock currently yields a thirst-quenching 4.87%. Last Wednesday (29 January), the board announced plans to increase dividend payments in line with inflation over the next five years. That would give me a hedge against rising living costs. Any share price growth would be on top.
Regulator Ofwat approved the dividend hike but this actually triggered a credit rating downgrade by Moody’s to Baa2/Stable. This could raise borrowing costs.
That’s a worry given that United Utilities is investing £13bn between now and 2030 to clean rivers and upgrade infrastructure, in what CEO Louise Beardmore called “the largest investment in water and wastewater infrastructure in over 100 years”.
Privatised utilities are controversial right now. United Utilities has been attacked by clean water campaigners over sewage discharges into Windermere in the Lake District. It’s also drawn fire for hiking household bills 32% over five years starting April.
With the United Utilities share price down 4% over one year and flat over five, I can’t work up much enthusiasm. Especially given its price-to-earnings (P/E) valuation of more than 30. That’s double the FTSE 100 average. Time to deploy my bargepole.
It’s a while since I looked at renewables-focused power giant SSE (LSE: SSE). So is this more tempting? I remember when the stock routinely paid income of around 6% so was surprised to see the trailing yield down to 3.7%.
The SSE dividend was cut last year
Then I remembered SSE rebased its full-year dividend per share for 2023/24 to 60p last May. That was down from 96.7p the previous year, a 38% drop.
The board’s planning generous targeted increases of between 5% and 10% a year to 2026/27. It says this “aligns future dividends with SSE’s ambitious growth profile”, but I’m not sure that aligns with my own income needs. The SSE share price is down 3% over the last year. Over five, it’s up a modest 8%, plus dividends.
The rebasing was designed to keep shareholder payouts affordable while SSE pumps money into infrastructure. Its transmissions business now plans to spend almost £32bn by 2031 to connect offshore wind farms to the power grid.
On 20 January, Citi warned that SSE also needs to address its long-term funding structure and warned “the lack of immediate action given the pending change of management and ongoing RIIO ET3 review is unlikely to delivery this clarity”.
SSE doesn’t grab me either. Even though its shares look much better value than United Utilities, with a P/E of just over 10 times. Luckily, I’ve still got my bargepole handy.
The post 2 popular UK income stocks I wouldn’t touch with a bargepole right now appeared first on The Motley Fool UK.
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Harvey Jones has positions in Legal & General Group Plc, Lloyds Banking Group Plc, and M&g Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
