Forget buy-to-let! FTSE 100-member SSE’s share price could be a better bet
While inflation may have fallen to 2.4% last month, generating a high income return remains a priority for many investors. As a result, buy-to-let properties could be appealing, having generated high returns in previous years. But with tax changes and uncertainty surrounding the UK housing market, the FTSE 100’s dividend yield of over 4% could become increasingly more attractive.
Of course, a number of FTSE 100 stocks offer significantly higher yields than the index. One example is SSE(LSE: SSE), which has a 7%+ dividend yield. Could it therefore be worth buying alongside a dividend growth stock which released a positive update on Tuesday?
Improving prospects
The company in question is specialist technical fluid power products supplier Flowtech Fluidpower(LSE: FLO). It released a trading update which showed revenue increased by 54% in the first nine months of the year. Of this, 6.7% was organic, while the remainder was from acquisitions.
The company continues to have a positive outlook about future growth rates for the fluid power market. Its diverse range of customers in the UK and EU could provide it with a degree of resilience over the medium term.
In terms of its income prospects, Flowtech Fluidpower currently has a 3.7% dividend yield, which is covered 2.6 times by profit. This suggests that it could rise at a faster pace than profit, without hurting its financial standing. And with earnings due to rise by 9% next year, inflation-beating dividend growth could be on the cards. With the stock trading on a price-to-earnings growth (PEG) ratio of around 1.4, it seems to offer a wide margin of safety at the present time.
Low valuation
As well as a 7%+ dividend yield, SSE also seems to offer a low valuation. The company continues to face uncertainty from a variety of areas. For example, regulatory and political risk remains high, and could continue to weigh down investor sentiment. There are continued fears surrounding the prospect of nationalisation, and this may help to explain why the stock has a price-to-earnings (P/E) ratio of under 11 at the present time.
Additionally, a recent profit warning hurt investor sentiment, while the general optimism among investors (which remains in place despite the recent stock market correction) means that defensive shares are less popular.
SSE may not be as defensive as it once was, as a result of the risks it faces, but it could prove to be a worthwhile investment should market volatility continue.
With the threat of a global trade war and rising US interest rates, its inflation-beating dividend growth and high yield could offer relatively strong returns for investors over the medium term. And with plans to reshape the business through a split in the coming months, the long-term prospects for the company appear to be improving. As such, now could be the right time to buy.
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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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