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Here’s why I’d dump dividend stock SSE and buy the FTSE 100 instead

Shares in FTSE 100 energy firm SSE (LSE: SSE) fell this morning as the company warned on profits for the full year within its Q3 trading statement. 

With dividends continuing to look fragile and the risk of political and economic uncertainties further impacting the stock’s value, I still believe that there are far easier ways of making money in the markets.

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Delayed payment

Today’s downgrade was attributed to the ‘standstill period’ in the UK’s Capacity Market Auction (which gives contracts to firms such as SSE to provide back-up power in winter months and at times of exceptional demand) following an EU court ruling back in November.

As a result of this delay, SSE believes that it will be “unlikely to receive, or be able to recognise” the remaining £60m of income derived from this market until after its 2018/19 financial year. 

Although the company was quick to state that assurances from the UK government should make this issue “a matter of timing only“, it did say that adjusted earnings per share for the current financial year will now be roughly 6p less than previously thought and somewhere between 64p and 69p.

Elsewhere, SSE — one of the ‘Big 6’ energy providers in the UK — confirmed plans to use up to £200m of the proceeds from recent sales of stakes in its telecoms business and onshore wind farms to fund a share buyback and reduce net debt. The former is likely to begin before the end of March. 

According to CEO Alistair Phillips-Davies, the company is also “making progress” in looking at options for its Energy Services arm, including listing it as a separate entity or selling it. If neither of these is possible then this retail division would be retained as a separate business. A further update on this has been promised, again, by the end of March. 

Dividend doubts

SSE’s stock was among the worst performing shares in the FTSE 100 this morning (although it has since recovered to trade flat), beaten only by sector peer Centrica. This means that the company’s value has now fallen by 20% since last May. 

This might not concern long-term holders, of course, particularly those who hold the shares for its chunky dividends. Based on today’s share price (and the company’s intention to return 97.5p per share to holders in 2018/19), SSE yields 8.45%. That’s clearly preferable to what you’d get from even the best Cash ISA.

The only problem with this is that expected profits currently fail to cover this cash return. The longer this goes on, the more likely SSE will need to take a knife to the payout. With utility companies often used as a political football, customers continuing to migrate to smaller competitors, the possibility of a sustained period of warm weather hurting consumption and Brexit on the horizon, I think the probability of this happening can’t be easily dismissed. 

A far easier way of generating cash, in my opinion, would be to buy an exchange-traded fund that tracks the FTSE 100 index. Not only will this allow you to receive a decent dividend for far less risk, it’s also a seriously cheap way of gaining exposure to some of the biggest companies in the UK, many of whom have arguably far better long-term prospects than beleaguered SSE. 

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Paul Summers 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.

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