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Why I’d sell this 7% yielder to buy this FTSE 100 dividend stock

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I recently fessed up to once being a shareholder of SSE (LSE: SSE), a stock that I sold as soon as the vast competitive pressures facing the country so-called Big Six energy suppliers became apparent.

SSE’s share price may not have collapsed since I shifted out, but I don’t regret for one second selling out of the power play. Far from it, in fact, as the difficult competitive landscape is becoming more and more tough.

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Latest data from trade association Energy UK laid bare the increased difficulties facing the country’s established operators. More than 660,000 customers in total switched provider in February, a record high and up 60% from the same month in 2017.

Around 130,000, or 20%, of this number elected to switch to a cheaper, small- or mid-tier supplier. And as inflation looks likely to continue outstripping wage growth, it is likely that more and more British households will shop around for a cheaper tariff.

The lights are flickering

As I mentioned last time I covered SSE, its planned tie-up with nPower to rescue its fading retail operations isn’t exactly done and dusted.

Indeed, news earlier this month that an asset swap between German utilities giants E.ON and RWE will be investigated by the Competition and Markets Authority — nPower is owned by innogy SE, one of the assets E.ON has its eye on — has thrown an extra potential spanner in the works.

In the meantime the erosion of SSE’s customer base shows no signs of receding, the number of clients on its books slipping to 7.68m as of December 31 from 7.72m three months earlier, and from 8.08m at the end of 2016.

At the moment, City analysts expect SSE to bounce from an anticipated 7% earnings decline in the year to March 2018 with a 5% rise in fiscal 2019. I am not so convinced, however, and reckon a P/E ratio of 10.3 times for the upcoming period does not totally reflect the probability of meaty downgrades to these forecasts.

What’s more, I reckon SSE’s patchy profits outlook and heavy debt pile could also see its progressive dividend policy fall by the wayside. As such, investors should treat predicted dividends of 94.4p and 97.2p per share for this year and next — up from 91.3p last year and figures that yield 7.5% and 7.7% respectively — with a large pinch of salt.

A better dividend bet

Those on the lookout for secure dividends should look at Hargreaves Lansdown (LSE: HL) instead.

Supported by a predicted 13% earnings rise in the 12 months to June 2018, the financial company is expected to supercharge the dividend from 29p per share last year to 40.4p in the present period. And City analysts expect rewards to leap again, to 46.1p in fiscal 2019 as earnings also rise 14%.

Sure, subsequent yields of 2.5% and 2.8% for this year and next may lag those of SSE by no small distance. But for those seeking strong and sustained payout growth I believe the FTSE 100 firm is a far superior bet (and deserving of a forward P/E multiple of 32.5 times), as business flows boom. It saw net new business jumping 43% to £3.34bn during July-December from a year earlier, for example.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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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