The Motley Fool

Why SSE plc isn’t the only dividend stock I’d buy with my first £1,000

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.

Image source: Getty Images.

If you’re investing in stocks with limited funds, then it’s more important than ever to make sure you keep costs under control. One of the simplest ways is to avoid trading too often.

Today, I’m looking at two high-yield dividend stocks I believe could deliver a market-beating performance over the next few years.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

A 7.9% yield I’ve bought

Shares in utility group SSE (LSE: SSE) are currently trading at a six-year low, with a forecast dividend yield of 7.9%.

I’m not sure this gloomy outlook is justified, having recently added SSE to my own portfolio. Although the group faces political pressure to cap prices and has lost customers to smaller rivals, the board is taking steps to address these problems.

SSE plans to combine its retail business with that of nPower, forming a new company. The new business will have a tighter focus on retail and greater scale, which should help with pricing. Meanwhile SSE should receive a share of the profits of the new business while being free to focus on its core business of gas and electricity production.

Too cheap to ignore?

My view is that SSE’s depressed share price already allows for a fair amount of bad news.

In its most recent trading update, the company confirmed earnings and dividend guidance for the current year. This puts the stock on a forecast P/E of 10, with that prospective dividend yield of 7.9%.

Although such a high yield would normally be a warning that a cut might be likely, I’m prepared to accept this risk here. Even a 25% cut would still provide an attractive 6% yield, with the potential for future gains.

I believe SSE deserves a buy rating — a view shared by 11 out of the 16 City brokers who cover the stock.

This cash-rich miner could be on a roll

Mining groups have made a stunning comeback over the last two years. But I reckon some companies in this sector could still be attractive for dividend investors. One stock I rate highly is South32 Ltd (LSE: S32), which was spun out of FTSE 100 giant BHP Billiton in 2015.

The Australia-based group published its half-year results today. Revenue rose by 8% to $3,494m during the six months to 31 December, while underlying operating profit rose by 5% to $724m.

The interim dividend will be increased by 19% to 4.3 cents and shareholders will also receive a special dividend of 3 cents per share.

These payouts look comfortably affordable to me. South32 ended the half-year with net cash of $1,431m, despite spending $426m on dividends and share buybacks during the period.

Why are the shares falling?

South32 shares have fallen by 6% following today’s results. One source of pressure could be that volumes from some of the group’s mines fell during the first half, due to technical challenges. Higher revenue and profit was mostly due to higher commodity prices, a benefit that may not recur during the second half.

However, I think it’s worth noting that the group’s cash balance accounts for 10% of its share price. On this basis, South32’s forecast P/E of 13 and 4.3% yield look good value to me. I’d be happy to buy at these levels.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Roland Head 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.