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Are FTSE 100-listed SSE and this 5% dividend stock the bargains of the year?

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With the FTSE 100 having pulled back in recent months, the index now seems to offer a wider margin of safety. This could lead to impressive growth potential in the long run, with lower share prices providing the potential for higher capital growth in future years.

With SSE (LSE: SSE) continuing to offer a relatively bright future from an income and value perspective, it seems to be a strong buying opportunity. Its defensive characteristics could prove beneficial if market volatility continues.

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However, it’s not the only income stock that could offer a wide margin of safety. Reporting on Wednesday was a housebuilder that seems to be a strong investment opportunity.

Record growth

The company in question is London-focused housebuilder Telford Homes (LSE: TEF). It released a trading update for the year to 31 March 2018, with it expecting to report record levels of revenue and profit for the period.

Profit before tax is due to be around 30% higher than in the previous year, which would be slightly ahead of market expectations. This was boosted by a rise in gross and operating margins of around 3%, while a robust market for its homes has helped to improve its sales performance.

The company is experiencing a broad mix of sales between build-to-rent, individual investors, owner-occupiers and housing associations. And with interest rates expected to remain low, market conditions could continue to be favourable.

With a forecast dividend of almost 5%, Telford Homes appears to have a strong income outlook. Dividends are covered three times by profit, which suggests they are sustainable at their current level. And with the company trading on a price-to-earnings (P/E) ratio of around 8, it appears to offer excellent value for money. As such, now could be the perfect time to buy it.

Low valuation

With SSE’s valuation falling by 9% in the last year, the company now trades on a P/E ratio of around 12. This suggests that it offers good value for money, with investors seemingly uncertain about the increased regulatory risk which it now faces. Energy prices have continued to be a political issue, with higher inflation causing added pressure on household budgets. But with inflation falling to 2.5% in March, this pressure may begin to ease over the coming months.

With SSE having a dividend yield of around 7.5% from a payout that is covered around 1.25 times by profit, it appears to offer a solid income future. It may also become increasingly popular among investors if market volatility continues and defensive assets are sought by increasingly risk-averse investors.

As such, from an income and value perspective the company appears to worth buying. A lack of real dividend growth may be forecast over the 2020 financial year, but with such a high income return at the present time, the stock could prove to be a bargain.

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Peter Stephens 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.

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