It’s been a brutal few days for stock markets but some dividend income stocks have shown their defensive capabilities.
While the FTSE 100 is down nearly 11.5% over the last week, two quiet achievers have managed to climb almost 5% each.
In turbulent times like these, that kind of resilience grabs my attention. Especially when it’s from a sector I’ve ignored for years: water utilities.
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Utilities have long been seen as classic defensive stocks. People don’t suddenly stop turning on the taps or boiling the kettle during a downturn. Their earnings are typically regulated too, which can help smooth the financial ride.
Of course, they’re not perfect. Utilities tend to lag in boom times and often carry high levels of debt.
In today’s world of elevated interest rates, that means bigger borrowing costs. It also makes their dividends look less appealing compared to the return on cash and bonds, which carry little or no capital risk.
Even so, these two water giants have defied the market panic
United Utilities is this week’s biggest winner
United Utilities (LSE: UU) is the best performer on the FTSE 100 over the past week, the shares jumping 4.9%. Over 12 months, it’s barely moved (up less than 1%), but over five years, it’s climbed 25%.
That’s before factoring in its dividend, which currently yields a tempting 4.88%. Last year, it hiked the dividend by 9.4% to 49.78p per share.
There are higher yields out there, but few come with the same level of perceived stability. That said, United Utilities isn’t cheap. At 33 times earnings, the stock trades on a premium valuation.
The group is also committed to a £13bn investment programme over the next five years, which will go towards the biggest infrastructure upgrade in more than a century. And it’s putting aside £525m to help low income households pay their bills. Net debt is already high at around £9bn, bigger than its £7bn market cap.
Despite that, the board expects to increase dividends in line with inflation, while the balance sheet still looks sturdy, with £2.6bn in liquidity.
Personally, I’m more interested in stocks that have dropped but for more cautious investors, this kind of performance may be worth considering.
The Severn Trent share price is on the up
Severn Trent (LSE: SVT) has also made a splash this week, with its share price up 4.77%. It’s gained 5% over the year, and 22% over five years (again, before dividends). That’s also a pretty solid total return from an easily overlooked FTSE stock.
Like United Utilities, it’s not cheap, with a price-to-earnings ratio of around 33. It has net debt of around £7bn against a £7.7bn market cap.
The group tripled half-year profits to £192m in November but came under fire for missing drinking water standards, while paying CEO Liv Garfield £3.2m despite a £2m fine for a sewage spill in the River Trent. Last year, it hiked the dividend more than 9% to 116.84p per share. The current trailing yield is a solid 4.57%.
If markets recover quickly, these steady climbers could fall out of favour. But if interest rates drop or market volatility continues, these are worth considering for investors who prize a good night’s sleep.
