I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term.
Right now, I reckon utility company SSE (LSE: SSE) is looking a great buy for income.
Windows of opportunity
There’s always an undercurrent of critical noise surrounding utility companies. From time to time it rises several decibels: a round of hefty increases in gas or electricity bills can up the volume, and/or some politician seeking easy favour with voters by threatening to “do something” about the “obscene profits” utility companies are supposedly making.
The fact is, these companies must be investible, and margins and return on capital have actually been fairly constant over the years. History shows that the occasional crescendos of noise from crabby consumers and pontificating politicians are fleeting, the only tangible result being a temporary dip in utilities’ shares, giving canny investors a window of opportunity to lock in a higher income.
A great opportunity right now
At the recent Labour Party conference Ed Miliband courted voters with the carrot of a temporary freeze on gas and electricity bills and a new “consumer-friendly” regulator, if Labour wins the 2015 election. Miliband’s comments immediately sent utility shares down, wiping £2bn off the value of the Footsie’s biggest energy companies.
The average intraday low of SSE’s shares last week was 1,455p, bringing the stock’s trailing 12-month dividend yield up to 5.8% from the 5.3% on offer before the Labour leader’s speech. The last time a trailing 5.8% yield was available from SSE was over seven months ago.
SSE’s dividend policy for the current year (ending March 2014), and onwards, is to give shareholders “annual increases that are greater than RPI inflation”. In the wake of Miliband’s comments, SSE moved to reassure investors:
“Despite the intensifying political debate, we will maintain our operational and financial discipline, to enable us to deliver an above-inflation increase in the dividend for this financial year and beyond”.
Analyst dividend forecasts for this financial year suggest buyers of SSE today will be locking in a 6% starting yield — with the prospect of real annual income growth thereafter. Hence, I rate SSE a great buy for long-term income investors right now.