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Why I’d buy FTSE 100-member SSE’s share price today for its 7% dividend yield

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Although the FTSE 100 has a dividend yield of around 4%, the decline in the SSE (LSE: SSE) share price over the last year means it yields over 7% at the present time. The company has a revised strategy set to lead to reduced volatility and an increasing focus on renewable energy. This could provide it with a more sustainable income outlook over the long run.

Since SSE has a relatively undemanding valuation, it could be worth buying alongside another utility company that released an update on Monday. While significantly more speculative than SSE, its total returns in the long run could be relatively impressive.

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Improving performance

The company in question is developer and operator of power generation plants in India, OPG (LSE: OPG). Its trading update for the 2019 financial year showed its profits are set to be in line with expectations. Its total generation of 2.71 bn units was down by 2% compared to the previous year, but was in line with previous guidance.

The company’s average tariff increased by 10% as a result of tariff rises for captive customers. Its Plant Load Factor of 75% was down 2 percentage points from the previous year.

Although OPG is a relatively speculative stock, it could offer long-term growth potential. Demand for electricity in India is expected to grow rapidly over the long run, and this could provide the company with a tailwind. As part of a diversified portfolio of shares, it may offer investment appeal for less risk-averse investors.

Dividend potential

As mentioned, SSE now has a dividend yield of over 7% following its 16% share price decline of the last year. During this time, it’s experienced a number of challenges. Those have included a profit warning that was caused to a large degree by its trading arm. In response, the company has changed its strategy so that its financial performance isn’t materially affected by its hedged positions.

SSE has also been seeking to pivot away from domestic energy supply for some time. Although the proposed combination with npower has fallen through, its domestic energy supply business is still expected to be spun-off, or sold in the short term. This will allow the company to focus on renewable energy infrastructure, which could provide it with improving financial prospects.

Although the company’s financial performance has been disappointing in the last year, its dividend is expected to be covered 1.4 times by profit this year. It remains committed to a five-year dividend growth plan which could see its shareholder payouts beat inflation.

Alongside its 7% dividend yield, this could make the stock highly attractive to income-seeking investors. With a price-to-earnings (P/E) ratio of 9.6, it also offers a wide margin of safety at present. As such, now could be the right time to buy it.

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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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