Passive income is one of the keys to financial abundance and I’m pretty sure we would all love that. This is where stocks with huge dividends come in. You invest and get to enjoy the large dividend payouts until the end of time, simple right?
Sadly, it’s not quite as straightforward as that. Sometimes when a company has a very high dividend yield, it can mean that it is struggling and so boosts the yield (or maintains it despite a falling share price) to attract investors. So, what’s key is whether the company can sustain the dividend, which is why these two stocks are on my radar…
Full of energy
SSE (LSE: SSE) is currently offering a very attractive dividend yield of 8.9%, one that should have many investor’s heads turning. The stock has a reasonable P/E ratio of 11.4 which suggests that the company could potentially be undervalued with the share price standing at around 1,100p.
Furthermore, SSE presents a clear future opportunity for growth as we take the global step towards cleaner energy. In fact, the company has made zero emissions its central goal for the next couple of decades, which reassures me that SSE should not fall by the wayside as the main energy sources begin to change.
SSE’s management has assured investors that it will be able to sustain the generous dividend until 2030, which leads the contrarian in me to believe that this stock is a strong medium-to-long-term investment. While some investors could be nervous about the company’s debt levels, which have more than doubled in the past five years, I believe the solid plan for renewable energy will help to lower this risk. It’s also hard to ignore the falling customer numbers with SSE closing more than half a million accounts in one year. However, I believe that these red flags are only temporary as the inevitable demand for cleaner energy should win back many customers. If you are a high-income investor, I think that this is a risk worth taking for high dividends to add to your portfolio.
Legal & General (LSE: LGEN) looks set to remain my favourite high-yielding financial stock for quite some time. The stock is currently offering a brilliant dividend yield of 7%. What’s more, the company has managed to double its profits since 2013 and doesn’t seem to be slowing down the momentum.
If you want reassurance that the attractive dividend is set to stay, then the fact that last year, the dividend coverage was a stable 1.5x, suggests it’s unlikely there will be a cut any time soon. The current P/E ratio stands at 7.8 which tells us that the stock is undervalued, leading me to believe that now could be the time to buy.
Legal & General has seen some big wins recently, mainly due to the pension risk transfer market. During the first six months of the year, the company has taken £6.7bn of pension liabilities from company schemes. The pension risk transfer market will only rise in demand and Legal & General is there to fulfil the need. In my opinion, this is one of the most reliable dividend heroes out there.
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fional 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.
Motley Fool UK 2019