FTSE 100

Do Severn Trent shares offer dividend investing potential?

Could Severn Trent produce relatively sound income returns?

Rising inflation and rock-bottom interest rates could increase Severn Trent’s (LON: SVT) income investing appeal. After all, the utility company has a dividend yield of around 3.6%. That’s slightly higher than the FTSE 100 index’s (INDEXFTSE :UKX) yield of 3.4%.

However, the firm’s dividend growth appeal could become increasingly attractive. As mentioned, inflation has risen over recent months. In fact, it now stands at more than twice the Bank of England’s 2% target. And, with many forecasters anticipating a further rise in inflation, maintaining the spending power of an income stream may become more difficult.

That task is arguably made more challenging by interest rates that remain at a record low. Certainly, they are set to rise over the coming months in response to higher inflation. But their pace of rise may be held back to at least some extent by ongoing economic uncertainties that make it more difficult for the Bank of England to manage its goals of price stability and economic growth.

As a result, SVT shares could be relatively attractive. The company is aiming to increase its dividends per share by the same rate as CPIH inflation, which is CPI plus owner occupiers’ housing costs. CPIH currently stands slightly below CPI at 3.8% versus 4.2%. However, a rise in dividends that matches inflation could prove to be increasingly useful over the coming months.

In addition, the company’s latest results showed it is making progress in delivering on its strategy within the current regulatory period. Its relatively resilient financial prospects could hold increasing appeal to investors should the economic outlook deteriorate based on rising inflation, Covid-19 or other factors. This could increase demand for its shares and lead to an improving outlook from an investment perspective.

Undoubtedly, the economic outlook remains a known-unknown. Just as it could deteriorate, factors such as an avoidance of more stringent lockdown measures and a return to lower levels of inflation may create more upbeat trading conditions for cyclical businesses. This may encourage a continued ‘risk-on’ period among investors that lessens the appeal of defensive companies.

However, with a relatively robust outlook, dividend growth prospects that could match inflation and defensive characteristics, Severn Trent’s shares could offer upbeat prospects compared to the wider FTSE 100 index.

At the time of writing, the Severn Trent share price is 2,831.00 GBX.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.