Here’s a top FTSE 100 stock to consider for long-term passive income
Investing in electricity producers can be a great way to source passive income over time. While there’s been some turbulence more recently, FTSE 100 share SSE (LSE:SSE) has — over the long term — proven to be one such robust dividend payer.
Its operations are essential — after all, we need a steady flow of electricity regardless of whatever political, economic or social changes come along. So these sorts of companies tend to enjoy strong earnings and cash flow visibility, the bedrock of any robust dividend policy.
Green energy specialists like SSE (LSE:SSE) aren’t immune to rare profits shocks though. Their bottom lines can take unexpected hits during unfavourable weather conditions, such as when calmer conditions restrict energy generation from its wind turbines.
Pleasingly in this case, SSE’s less exposed to one technology that some other renewable energy stocks. Around two-thirds of its green portfolio is dedicated to onshore and offshore wind, with the remainder linked to hydro power. The company also still produces electricity from gas-fired plants.
And its 12GW project pipeline will diversify the company further into areas such as solar and battery storage.
I think this FTSE 100 share has incredible long-term potential as the world moves away from fossil fuels and towards renewable and nuclear. The landscape’s especially supportive in the UK under current Net Zero plans.
Challenges and opportunities
That said, there have been some challenges of late, with supply chain issues, higher interest rates, and greater construction and operational costs impacting new capacity additions.
SSE has had to trim its own investment plans in recent times. It now expects to spend £17.5bn in the five years to 2027, down £3bn from its previous target.
Yet the landscape could be about to improve as falling inflation reduces interest rates, and declining support for renewables in the US potentially eases supply chain issues.
In the near term, falling UK capacity looks set to boost SSE by raising subsidy prices at the next contracts for difference (CFD) auctions in September. These annual contests allocate subsidies for low-carbon electricity providers over a period of years.
Dividend growth
SSE decided to rebase the annual dividend in financial 2024 to reallocate cash for its capacity building strategy. While this offers substantial long-term growth potential, the risk of future payout reductions remains a threat.
This is especially so given that the company expects debt to rise as capital expenditure keeps increasing. Its net-debt-to-EBITDA ratio’s tipped to rise, to 3.5 – 4 times in the medium term. That’s up from 3.2 times today.
Encouragingly however, City analysts expect SSE’s dividends to keep trending higher after growth resumed last year:
| Financial year ending March… | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2026 | 68.45p | 9% | 3.7% |
| 2027 | 73.65p | 8% | 4% |
| 2028 | 78.34p | 6% | 4.3% |
Broker projections are never set in stone. But if current forecasts are true, dividends on SSE shares are tipped to grow ahead of the likely FTSE 100 average over the next three years. This also means yields move above the UK blue-chip average of 3-4%.
While it’s not without risk, I think SSE is a great dividend stock to consider for a long-term passive income.
The post Here’s a top FTSE 100 stock to consider for long-term passive income appeared first on The Motley Fool UK.
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Royston Wild 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.
