I would dump the cash ISA and pick up SSE’s 7%+ dividend yield

SSE plc (LON: SSE) could offer a low share price and a high yield, which may help it to outperform a cash ISA, in my opinion.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While the performance of SSE (LSE: SSE) has been very mixed over recent months, the FTSE 100 utility company could now offer an improving outlook. Its shares appear to offer a wide margin of safety, while its income return could boost its total return over the coming years.

This could mean that its risk/reward ratio is more appealing than investing through a cash ISA, where the potential returns available are around 1.5%. Alongside another FTSE 100 stock which released an update on Wednesday, the company could be worth buying for the long term.

Improving prospects

The other company in question is wealth manager St. James’s Place (LSE: STJ). Its annual results showed it has performed well at a time when the wider financial services sector has experienced an uncertain period.

For example, it reported a rise in gross inflows, increasing to £15.7bn from £14.6bn in the previous year. Its funds under management also increased to £95.6bn from £90.7bn a year ago. Meanwhile, underlying operating profit increased 9% to £1,002m, with underlying cash earnings per share rising by 10% to 58.7p.

Looking ahead, the stock is forecast to post a rise in earnings of 20% in the 2019 financial year. Despite this, it has a price-to-earnings growth (PEG) ratio of just 1.2, which suggests it may offer a wide margin of safety.

One reason for its low valuation is its share price decline of 16% in the last year. Although further falls in the stock price cannot be ruled out, St. James’s Place appears to have a sound strategy and could deliver a successful recovery over the medium term.

Changing business

While utility companies are usually desired for their relative stability, SSE is undergoing a period of intense change. The process of disposing of its domestic energy supply division has been somewhat long-winded, with plans to merge it with npower falling through. It’s now assessing its options, and is likely to make a decision on how to dispose what could be a challenging business over the medium term. For example, political risks are high, while price caps could signal lower levels of profitability are ahead for the sector.

As such, the company’s renewables division could become an increasingly desirable place to invest. SSE has a strong foothold in the green energy industry, and this could help to catalyse its financial and stock price performance in the long run.

In the meantime, the company has a dividend yield of around 7.1%. It also plans to raise dividends by at least as much as inflation over the next few years, which could become increasingly appealing to investors should the UK economy experience a challenging period. As such, after a disappointing year which has seen its share price come under pressure at times, now could be the right time to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of SSE. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Time to sell this FTSE 100 underperformer, says Goldman Sachs

Analysts at one investment bank have a ‘sell’ rating on FTSE 100 stock Diageo. But could a short-term weakness in…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Down 5%, Glencore’s share price looks a serious bargain to me now

Glencore’s share price looks undervalued to me, supported by strong earnings growth prospects and the potential resumption of extra shareholder…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’d invest £6,580 in this FTSE 250 REIT for £500 passive income

This FTSE 250 renewable energy enterprise is on track to become a Dividend Aristocrat! Here’s how I’d invest to earn…

Read more »

Investing Articles

Buying 1,000 of some dividend shares today unlocks £45 in weekly passive income!

These shares are among the biggest dividend payers in the FTSE 100. Should investors be buying them now to earn…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

If I’d put £5k in index funds 5 years ago, here’s what I’d have now

Investing in index funds is an excellent way to grow wealth with minimal effort. But how much money can investors…

Read more »

Investing Articles

10.2% yield! 1 of the top income stocks to buy in July?

A 10% yield's pretty rare, but this firm's been growing shareholder payouts for nine years! Does that make it one…

Read more »

Investing Articles

‘FTSE 100 to skyrocket to 10,000’! 1 cheap stock I’d buy before the surge

Analyst forecasts predict a massive surge for the FTSE 100 may be coming by April 2025! Should investors snap up…

Read more »

Investing Articles

My Taylor Wimpey share price prediction for the second half of 2024

Having underperformed the FTSE 100 from January to June, our writer reckons the Taylor Wimpey share price might enjoy a…

Read more »