hen it comes to investing for income, the concentration of companies such as Royal Dutch Shell, AstraZeneca and BP in equity funds is astonishing, with most heavyweight funds holding at least one of these firms in its top 10.
Last week, Investment Adviser reported the unhappy reaction from key income fund managers to Labour’s plans to freeze energy prices. Veteran investors, including Invesco’s income manager Neil Woodford, slammed the plans, claiming it would make the energy sector “uninvestable”.
Companies such as Centrica and National Grid, at least until the statement made by Ed Miliband at the Labour conference in Brighton, had been rocketing and offered income-seeking investors yields of roughly 5 per cent. Should Mr Miliband’s government be elected, which is highly anticipated, the effect on energy stocks could be disastrous.
For the moment, however, analysts believe some of the stocks in the sector, along with other key income-producing stocks, offer attractive yields. Sheridan Admans, investment research manager at The Share Centre, gives his five income picks.
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Centrica
With gas consumption rising 9 per cent in 2012 and predictions expecting an increase of up to 15 per cent in 2013, demand for Centrica is showing no signs of slowing. Investors will be happy to hear that Centrica continues to improve its own supply of gas, protecting itself against potential gas price movements. The group has an attractive prospective yield of roughly 4.8 per cent for 2014 and intends to buyback £500m of shares during the year. What’s more, not only has the group been cutting costs with the aim of delivering £500m in savings, but Centrica aims to double profits in US business in the next three to five years.
National Grid
Announcing a new dividend policy in March, wherein dividends will grow in line with inflation from 2014, National Grid’s prospective yield of 5.4 per cent should appeal to investors. In fact this year’s yield is set to beat inflation by 1 per cent. June’s fall in share price continues to provide investors with good opportunities to capitalise, with the group showing signs of recovery. Additionally, National Grid management is focusing on improving US operation returns with regulatory issues on both sides of the Atlantic now being resolved.
GlaxoSmithKline
The defensive nature of the sector and stock, as well as the competitive yield of roughly 4.5 per cent, makes this a core holding for investors looking for income and portfolio stability. As a very cash-generative business, GlaxoSmithKline is committed to dividend increases, share buybacks, and bolt-on acquisitions; all attractive features to the investor. Furthermore, GlaxoSmithKline remains focused on reducing costs, with new manufacturing processes and a major change programme expected to save £1bn a year by 2016. The company’s investments in emerging markets are also paying off, with these regions showing the strongest growth in the first half of 2013.
Vodafone
Investors may be tempted by Vodafone as a top dividend payer in the FTSE 100 index with a prospective yield of 5.2 per cent. Emerging markets continue to experience steady growth, as do data services that now represent 15 per cent of revenues and have proven fairly defensive in recent years. Vodafone intends to reinvest the dividend received from its US interests into key areas of strategic focus: data, enterprise and emerging markets. The group’s US business also continues its strong performance. In the past Vodafone has passed on its dividend to investors and may do so in the future, but it currently has no stated intention to do so.
