Can FTSE 100 dividend stocks Centrica and SSE afford their massive 7%+ yields?

Centrica plc (LON: CNA) and SSE plc (LON: SSE) offer two of the highest dividend yields on the FTSE 100 (INDEXFTSE: UKX) and Harvey Jones says they might just prove sustainable.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

British Gas owner Centrica (LSE: CNA) and electricity and gas supplier SSE (LSE: SSE) are paying storming amounts of income right now, among the highest on the FTSE 100. Which is both exciting, and also cause for concern.

Power plays

Right now, Centrica yields an astonishing 8.38%, the highest on the index. SSE runs it close in third place, yielding 7.56%. By comparison, the average easy access savings account pays just 0.53%, which means you get almost 16 times that income level from these stocks. Naturally, this also comes with greater risk.

The first threat is to your capital. Both stocks have fallen sharply over the past year, with Centrica down 28% and SSE down 13%, against a rise of around 2% on the FTSE 100. Things look even worse measured over five years, with Centrica down 63% and SSE down 19%, while the FTSE 100 is up 17% over the same period.

Frozen out

It has been a tough time for the utility sector generally, amid political threats of price freezes and renationalisation, growing competition and heavy investment programmes, while weak energy prices have squeezed profits from electricity generation. Anybody who still considers this to be a defensive sector should think again.

However, share price weakness could also be a buying opportunity. For example, Centrica currently trades at just over 11 times earnings, which my Foolish colleague Peter Stephens thinks looks ludicrously cheap, especially as it shifts away from riskier oil and gas exploration to the more secure task of supplying domestic energy.

Take cover

The dividend looks stretched with cover of just 1.1 times from earnings. It has been held at 12p per share for the last three years and this should continue this year. Analysts are pencilling in a small cut to 11.4p in 2019 but this is hardly disastrous, as it would still leave the yield at a far-from-negligible 7.8%, with cover of 1.14.

Centrica’s forecast earnings growth looks sluggish, just 2% this year and 1% in 2019, but this marks a big improvement on the previous four years, which were all in the red. I do not anticipate a quick share price turnaround, though. Margins are wafer thin at 4%, although planned cost-cutting could help. It is still worth considering for the warm glow of that bumper income.

Electric avenue

Peter Stephens looked at SSE recently and concluded its income prospects remain resolutely bright, as it pursues plans to merge its retail arm with Npower to create a dominant utility player. SSE is even cheaper than Centrica at 10.35 times earnings which again looks tempting. However, earnings per share of 81.3p and a total dividend per share of 94.7p gives even thinner cover of just 0.85 times earnings.

Management has been part funding the dividend from asset disposals but is still promising progression, which will see the payout climb to 97.5p in full-year 2018/19. It will be re-based at 80p once the Npower takeover has been completed then keep pace with RPI for at least three years after that. Even if the dividend slips from today’s dizzy heights, it should still offer plenty to delight.

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.

harveyj has no position in any of the shares mentioned. 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »