Investing in utility shares has been a popular means for investors to generate a high, dependable income which generally rises with inflation. At the moment, it is still possible to obtain two of those aspects from the utility sector, but the ‘dependable’ part may no longer be applicable.
The reason for this is the rise in the popularity of nationalisation. The general public seem to be in favour, and with Jeremy Corbyn’s Labour party gaining in popularity there could realistically be a change in government in the next four years.
Therefore, now could be the right time for income investors to consider new options. Here are three stocks which could help to replace politically-challenged utility shares.
Nationalisation seems to be extremely popular among the UK general public. A recent poll for The Guardian showed that 83% of respondents were in favour of nationalising water companies, while electricity and gas companies were both tied on 77%.
Unfortunately, this shows that the tide seems to be turning against capitalism and free enterprise. It means that the political arena may begin to shift in this direction, and the idea of nationalisation of certain industries may not be considered radical for that much longer.
Potential for change
With Labour apparently being pro-nationalisation for the aforementioned industries, there seems to be a clear path to a return to state ownership. That’s particularly the case because Labour are now tied with the Conservatives in a number of opinion polls. While such polls have a recent history of being inaccurate, the overall picture is one of intense uncertainty as to who will win the next general election.
This in itself could cause the share price performances of utility stocks to disappoint over the medium term, as investors may become more cautious about the long term prospects of the various industries which could be nationalised.
This could mean that income investors will need to look beyond utilities in the next few years should they want to generate a high, dependable and inflation-beating income. Although it may not be possible to find companies with business models that are as low-risk as utility companies have been in the past, companies such as British American Tobacco (LON:BATS), AstraZeneca plc (LON:AZN) and HSBC (LON:HSBA) could all offer bright income futures.
British American Tobacco has a mix of dependable income growth from its tobacco operations, while its investment in next generation products may stimulate its earnings in the long run. HSBC’s pivot to Asia may provide it with an above average growth rate due to rising wealth levels, while a cost reduction strategy is making it more efficient. AstraZeneca, meanwhile, is investing heavily in its pipeline and could begin to deliver high growth rates in the medium term.
With the three companies offering dividend yields ranging from 4% to 5% in the current year, they seem to provide relatively high income returns. They could therefore prove to be stronger income opportunities for the long run than their utility counterparts.
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