One reader recently told us he invested in utility companies such as Scottish and Southern Energy (SSE) to cover the costs of his energy usage.
Covering the cost with a stock in the same sector that is making money from billing users must have given him a great deal of satisfaction.
Here, FE Trustnet highlights three common expenses that investors can cover with stocks from the same sector.
Utility bills
According to Ofgem, the energy and gas regulatory body in the UK, the average household pays more than £1,300 per year in energy bills.
Tina Cook (pictured), investment analyst at Charles Stanley, says there are plenty of income stocks out there to help you draw a steady income, especially in the utilities sector.However, she admits there are also political risks to consider.
“If you’re willing to ignore political and regulatory risk, there are attractive returns, and attractive real returns on dividends, which means they are above RPI and inflation,” she said.
One massive positive for utility companies, she says, is that they have clear dividend policies so investors have a good idea of what to expect.
SSE, for example, targets annual rises in its payout that are at least in line with RPI inflation, while maintaining dividend cover over the medium-term in a range of around 1.5 times.
As Cook highlights, SSE is one of only five FTSE 100 companies whose dividend has outpaced inflation in every year since 1999.
It is currently yielding 6.5 per cent, which is expected to drift up to 7 per cent by March 2016.
A £20,000 investment in SSE would result in £1,300 of dividends a year, assuming a 6.5 per cent yield.
With a 7 per cent yield, you would need to invest just £18,751, assuming stable prices.
Investors may need a strong resolve to invest in the energy giant, however, as it sits in a sector plagued with political and regulatory interference.
The stock has lost 12.77 per cent over the last six months, although some experts argue that the best time to invest in a stock is after it has taken a hit.
SSE has more than doubled the returns of the FTSE 100 over the past decade, gaining 253.37 per cent.
Performance of stock vs index over 10yrs
Source: FE Analytics
Another utility stock Cook says has clear-cut dividend policies is National Grid, which promises to increase dividends at least in line with RPI inflation for the next eight years.
She also says water companies can be a good bet for income investors, but points out many of these are in the last year of a five-year dividend policy agreement.
Water utility and waste management company Pennon Group is targeting dividends of inflation plus 4 per cent per year, United Utilities is aiming for inflation plus 2 per cent and Severn Trent is pushing for dividends of inflation plus 3 per cent – all until 2015.
Centrica, the owner of British Gas, doesn’t have a formula like the other firms, but it does aim for a real return on an annual basis.
It has also had a tough time of late, shedding 20.14 per cent over the last six months.
The stock has underperformed the FTSE 100 for the last several years, one of the few not to have been boosted by the 2013 rally.
Centrica is down 5.22 per cent over the last 12 months, while the index is up 9.11 per cent.
Performance of stock vs index over 1yr
Source: FE Analytics
However, for income investors, a dividend yield of 5.7 per cent could offset some of the share price pain.
This dividend yield is expected to drift up to 6 per cent in 2015.
Covering a £1,300 bill with a 6 per cent yield would require an investment of £20,167.
Tobacco
While FE Trustnet has already highlighted the devastating impact smoking will have on your wallet, let alone your health, investing in this sector could actually fund the habit – or pay for other day-to-day expenses. This is because tobacco firms are among the steadiest dividend payers out there.
The average 20-a-day habit will cost you £7.50 each day, which adds up to a frightening £2,737.50 in a year.
British American Tobacco (BAT), the second largest player on the world cigarette market, has paid a dividend in every single year since it listed more than 15 years ago, and it has never cut the payment in that time.
The stock is currently yielding 4.8 per cent, which is expected to drift up to 5 per cent at the end of this calendar year.
Analysts forecast the stock’s yield will rise to 5.4 per cent in 2015.
You would need to invest £54,750 to cover your habit with a stock yielding 5 per cent, or £50,694 with one yielding 5.4 per cent.
That’s a considerable sum of money.
Investors who held onto the stock when its shares were listed on the London Stock Exchange in September 1998 – after it split from Allied Zurich – would have seen stellar gains as well.
The stock has gained 897.21 per cent over the last 15 years, more than 800 percentage points higher than the returns of the FTSE 100 over this period.
Performance of stock vs index over 15yrs
Source: FE Analytics
Imperial Tobacco is another solid dividend payer in the tobacco space.
The company has raised its annual dividend by more than 12 per cent since 2009.
It is currently yielding 5.1 per cent, but analysts expect that to drift up to 6.3 per cent over the next two years, well ahead of the dividend from rival BAT.
With that yield, you would need £43,452 invested in a stock paying 6.3 per cent to cover a 20-a-day habit.
Even if this is lower than the figure for BAT, it is quite a considerable chunk of most people’s portfolios.
Travel
Holidays are by no means a day-to-day necessity, but investing in the likes of easyJet could help you with the cost of taking the family away this summer.
According to data compiled by insurer Churchill, the average British family of four spends £4,792 on a holiday.
Not only was easyJet one of the best performers in the FTSE 100 last year, it also has a solid dividend yield of 2.6 per cent.
This is unlikely to be sufficient to cover the cost of your trip, however.
You would need to invest £184,308 in the stock to cover the cost of your holiday, meaning it is more attractive from a capital growth point of view.
It is now targeting business travellers through more flexible booking, airports that are closer to tourist destinations and business-friendly timetables. Analysts expect both growth and dividend growth to continue for easyJet, as Jupiter’s Steve Davies and Numis’s Wyn Ellis told FE Trustnet last month.
The stock returned 105.07 per cent last year, making it one of the five best performers on the index.
It has come off a bit in recent weeks, perhaps offering a more attractive buying point for shareholders, although it has bounced back from its January low.
Performance of stock vs index over 1yr
Source: FE Analytics
EasyJet has made 78.04 per cent over the past 12 months, compared with just 9.11 per cent from the FTSE 100.
