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A FTSE 100 stock I’d buy to earn long-term passive income

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When buying stocks for my investment portfolio, I like to divide them broadly into growth and income stocks. While growth stocks ensure capital gains that accrue over time, income stocks ensure regular returns. 

Right now, they are a supplement to my earned income. But over time, these stocks can help me build a regular stream of passive income that can support me after retirement. 

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SSE has a healthy dividend yield

I have already bought some FTSE 100 stocks to this end and am constantly on the lookout for more. One of these is energy utility SSE (LSE: SSE)

The company offers a healthy dividend yield of 5.2%. Moreover, its share price is rising too. It has grown by 28% over the past year. While this is a smaller share price increase than that for many other FTSE 100 stocks, just the fact that it is increasing is good enough for me. 

I consider it annual share price change here only to ensure that I make healthy net gains. If its share price were falling, the passive income would be at the cost of my capital. In this case, however, my actual, if unrealised, gains are much bigger. Not only do I earn dividends, my capital is also growing. It is a double win. 

Profitable, despite Covid-19

So I was keenly awaiting SSE’s full-year results, which were released earlier today. Its adjusted profit before tax was up by 4% and earnings per share were up by 5% for the year ending 31 March 2021. Its reported numbers show way bigger increases, because of disposals. 

But I am more interested in the adjusted numbers, because they reflect a truer state of the business in a year when SSE was impacted by the coronavirus. This gets obscured by the massive disposals accounted for in reported numbers.

I am encouraged to see that it was able to remain profitable during this year. I am also heartened by the fact that at £170m, the expected impact of the pandemic for SSE is “towards the lower end of the guided range”

Considering that I would like to buy the share as an income investment, I am also encouraged by its dividend guidance. Of course, dividends are never guaranteed, but knowing the company’s intention is good. SSE says it will grow its annual dividends at the average retail prices index (RPI) inflation rate of 1.2%. 

The catch

While this is a definite positive at a time when inflation is rising, there is a catch. The most updated inflation measure for the UK now is the Consumer Price Index (CPI), and the RPI, as the Office of National Statistics says, is a “legacy measure”

And CPI inflation is already at 1.5% for April 2021. This means that SSE’s dividend policy only partially protects dividends from inflation. During a time of rising inflation, it would have been nicer if the company’s target increases were linked to the CPI inflation measure. 

My takeaway for SSE

Still, over time, I reckon this can even itself out. We are just coming out of a year of low inflation, which means that there were real gains from sticking to the inflation target so far as well. SSE is a buy for me from a passive income perspective. 

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Manika Premsingh 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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