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Forget the Cash ISA! I’d buy the SSE share price for its 5% yield

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I’ve just been looking at the latest best-buy Cash ISA rates, and they’re even worse than I feared. Right now, the best you can get on instant access is just 1.2%. Even if you lock your money away for five years, you will be lucky to get 1.7%.

In days like these, a high yield is a thing of beauty and, happily, the FTSE 100 is crammed full of stocks paying generous levels of dividend income. The opportunity to get 5% or 6% a year is too good to ignore, given that the average savings account gives you a 10th of that amount, and power giant SSE (LSE: SSE) looks a particularly tempting buy today.

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SSE has been one of the most solid income stocks for the last 30 years, with many investors using its steady dividend to underpin their portfolio. Lately, they’ve enjoyed a further kicker from the rising SSE share price, up a hugely impressive 40% over 12 months.

High energy

You wouldn’t normally expect that kind of share price growth from what should be a solid defensive performer, but it’s been playing catch-up after a difficult period, when many investors lost faith with the stock. Now they’re starting to believe again.

The SSE share price was hit by falling earnings and rising debt, as its retail home energy operation struggled amid tough competition, lower customer demand, and the government-backed price cap. Its wholesale business has faced headwinds, as the move to net zero carbon emissions sunk its gas and coal operations, while forcing it to invest heavily in wind, hydro and pumped storage. The group’s energy trading operations also floundered.

Operating profits in both these divisions fell sharply, although it’s ever-reliable networks division, which covers electricity transmission and distribution in Scotland and England, offered some ballast. SSE was nonetheless forced to cut its full-year dividend from just over 97p to 80p for 2019/20, with the inevitable negative impact on investor sentiment and the share price.

Goodbye coal

Things picked up after management announced in September it was successfully offloading its retail business to Ovo for £500m. Then, in December, Boris Johnson’s election win dispelled the threat of being nationalised by wannabe PM Jeremy Corbyn.

The £17bn group is intensifying its push into renewables, exiting coal altogether in March. Frankly it has little choice, but one downside is that revenues may be more unreliable due to intermittent wind, and output is currently around 5% behind plan.

After the recent share price surge, the stock trades at 16.4 times forecast earnings, so is no longer a bargain. Don’t expected it to rise another 40% this year. However, the 5% dividend yield looks more solid now, as management remains committed to targeting annual increases that at least keep pace with RPI inflation, until March 2023.

The risk/reward trade-off compared to a Cash ISA looks positive to me, and with a fair wind behind it, I’d buy SSE for long-term dividend growth.

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Harvey Jones 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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