Investing in electricity producer stocks like FTSE 100 business SSE (LSE: SSE) can be a good way to generate a reliable second income.
Operating green energy assets like this company can be expensive business. Costly damage to wind turbines is becoming more frequent too due to climate change.
However, earnings at renewable energy stocks still stay relatively stable due to the indispensable nature of their services. Electricity is an essential commodity at all points of the economic cycle. And this gives companies like SSE the financial firepower (and the confidence) to pay market-beating dividends year after year.
This particular dividend stock carries a forward dividend yield of 5.6% right now. It’s a reading that smashes the 3.7% FTSE 100 average.
Renewables giant
But what makes this electricity generator so special? As a potential investor, I’m excited by the steps it’s taking to supercharge renewable energy demand. This could lay the bedrock for exceptional profits (and thus dividend) growth over the next decade.
SSE plans to produce 50TWh of renewable energy from its asset portfolio by 2030. And following the sale of its 25% stake in transmission business SSEN last week it has more financial clout to pursue its green growth strategy too.
Oh, and of course, the £1.5bn it received for the sale could also boost shareholder dividends.
Today, SSE shares trade on a forward price-to-earnings growth (PEG) ratio of just 0.4. A figure below 1 illustrates that a share is undervalued.
I don’t have an unlimited reserve of cash I can use to invest. But that huge dividend yield and low PEG ratio put SSE near the top of my shopping list.
Another FTSE bargain?
Housebuilder Persimmon’s (LSE: PSN) share price also offers tremendous all-round value on paper. It trades on a forward price-to-earnings (P/E) ratio of just 5.2 times. Meanwhile, its dividend yields sit at an enormous 14.9% and 8.7% for 2022 and 2023 respectively.
I already hold Persimmon shares in my portfolio. But a steady stream of worrying data from the British housing market is discouraging me from building my holding.
Latest Bank of England data on Tuesday showed mortgage approvals for house purchase fell to 59,000 last month. This was down from 66,000 in September and 74,400 in August.
Mixed feelings
I’m retaining a positive outlook for Britain’s new-build homebuilders over the long term. A growing population, an increasingly competitive mortgage market, and ongoing government support for first-time buyers should all support strong demand.
However, I worry that profits could come under significant pressure next year as interest rates rise and the domestic economy sinks. This, in turn, could have a big negative impact on my passive income if dividends subsequently collapse.
A stream of profit forecast downgrades by City analysts is a troubling omen too. Brokers now expect Persimmon’s earnings to fall 39% year on year in 2023.
This FTSE 100 company could prove to be a great dividend stock for next year. But until news concerning the housing market improves I’ll be buying other UK shares for income.
