One future dividend stock I’d buy alongside Footsie star SSE plc

Here’s a stock offering growing dividends, to nicely complement the 7.5% from SSE plc (LON: SSE)

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The FTSE 100 has recovered a little of this week’s panic-led fall, but it’s still down — and when you’re investing for income, an irrational market crash is just what you need for locking-in higher long-term yields.

I’m drawn to two today, and the first is marketing communications and PR group Next Fifteen Communications (LSE: NFC) which I liked the look of when I last examined it in September. It’s still offering only relatively low yields of around 1.5%, but they’re strongly progressive — forecasts suggest dividend payments will have almost trebled between 2013 and 2020.

Growth by acquisition

The company has been taking advantage of the fragile post-Brexit economic outlook by making canny acquisitions at attractive prices, and it announced another one on Wednesday. The latest target is Brandwidth Group Limited, which is to be snapped up for an initial £6.2m — comprising £4.9m in cash and 292,000 new Next Fifteen shares.

There will also potentially be further payments depending on performance, which could take the total to £10.3m. The firm rates that at around 5.5 times Brandwidth’s adjusted 2017 EBIT, and says the deal should be earnings enhancing in 2019.

With a company growing partly by acquisition, it’s essential to keep an eye on liquidity — Carillion is the most painful recent example of what can go wrong when you overstretch. Next Fifteen reported £20.8m in net debt at the halfway stage at 31 July, which was 1.4 times EBITDA. That was up from £12.2m a year previously and needs to be watched, but I see it as comfortable.

Overall, I think there’s a future cash cow here. And with the shares at 416p, I see a forward P/E valuation of around 14 as attractive.

Cash today

No dividend portfolio can be complete without a few of today’s top FTSE 100 payers, can it? I see SSE (LSE: SSE) as being among the most reliable and one I’d tuck away for the very long term. 

The big utility companies enjoy clear visibility of future earnings and of future capital expenditure, which enables them to pay out a steady portion of their earnings as dividends. In its latest January update, SSE reiterated its target of lifting its 2017/18 dividend at least in line with RPI inflation, which to me only adds to the attraction.

Given the terrific long-term cash performance I’m seeing here, I’m at a loss to understand SSE’s share price fall — at 1,198p as I write for a 22% fall over the past 12 months. The recent Footsie dip hasn’t helped, but forward P/E multiples of around 10 just look crazily low to me.

Big yields

The price fall has boosted prospective dividend yields too, and we’re looking at forecasts for 7.5% and rising.

This low valuation is surely partly down to the malaise affecting the whole of the regulated utilities market, with populist politicians once again waving sabres in its general direction. But, as happens every time, this will pass.

Increasing competition and SSE’s restructuring will add uncertainty to the mix, but I agree with my Foolish colleague Peter Stephens that the spin-off of its domestic energy supply business has the potential to leave SSE as a more focused company.

Looking further back, SSE shares are down 15% in five years — a period that provided a 31% return in dividends. SSE looks cheap to me.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Next Fifteen Communications. 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.

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