There is a great choice among dividend paying FTSE 100 stocks right now. But the fast rise of the index over the past year means that I have to pore over them closely to find cheap stocks. Recently, I found one such gem. Not only does it pay dividends and is absurdly cheap, it is also a renewable energy stock! It does not get better, in my opinion.
Absurdly cheap FTSE 100 stock
I am talking about the energy producer SSE (LSE: SSE), which is priced at 1,650p as I write. This is not exactly a low price, especially considering how often we at the Motley Fool talk about the merits of various penny stocks. It is not even cheap when I consider its share price from a historical perspective. It is actually quite close to its all-time highs right now.
But, it is pretty cheap when I consider it from a relative perspective. Its price-to-earnings (P/E) ratio is 7.7 times. This is significantly lower than the average ratio for FTSE 100 stocks, at around 20 times. This comparison is essential to me, because it shows which stocks are undervalued.
SSE’s share price forecast
And considering that it is a financially healthy company in a sector that holds a lot of promise, it is reasonable to assume that its share price has a fair bit of room to rise from here. To be precise, it could potentially rise by around 165% from its current share price to reflect a P/E of 20 times. That would bring its share price closer to 4,370p, which sounds unthinkable today.
This might not happen in a hurry, of course. There are many factors that can be baked into share price forecasting, but this is one of the more straightforward ways to get some basic idea. At the very least it does indicate that the stock price could rise from here.
Above-average dividend yield
Additionally, it also has an above-average dividend yield of 4.9%. This is higher than the 3.4% that is the FTSE 100 average. In other words, it is one to consider from the dividend perspective as well. It might not have the eye-popping double-digit dividends that some other stocks offer, but it does have a couple of undeniably positive aspects to its dividends.
One is dividend continuity. In the last 20 years, there has not been even one year that it has slipped on dividend payouts. And its dividends are also inflation linked. This could be important at a time when inflation is rising.
However, this is one of its challenges as well. I doubt if its dividend growth next year will be able to make up for the high levels of inflation. Inflation could be as high as 4% next year, and SSE has accounted for a far smaller price increase. Its last operational update was also disappointing, showing a fall in energy production.
All in all, though, I think it is a great stock to buy for my portfolio, in any case. It had expected some dent to performance this year because of the pandemic. But that does not take away from the fact that it is in the promising green energy sector, is cheap, and pays dividends. Which is why I bought it for the long haul.
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Manika Premsingh 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.