As one of the UKs top utility companies, SSE (LSE: SSE) is considered to be a FTSE 100 top dividend stock. Indeed, with a dividend yield of 6.8% at the time of writing, as an income investment SSE looks to be one of the markets champions.
However, I believe theres another FTSE 100 stock that might be a better buy for investors, thanks to its strong cash generation and flexible dividend requirements.
Achieving the best returns for investors
But first, lets look at SSE. It might offer a high dividend yield today, but Im concerned about the companys future. With the governmentproposing restrictions on energy pricing, and overall costs pushing higher, SSE is facing a profit margin squeeze.
As well as the dividend to investors, SSE has to be able to fund debt costs and capital spending, both of which management should prioritise over shareholder distributions. This indicates that SSE might have some hard choices to make in the years ahead. As the groups dividend payout is only covered 1.3 times by earnings per share, theres not much headroom for extra costs in the budget.
That being said, the company might be able to work something out, so it can save the dividend, although Id rather be safe than sorry. Shares in SSEs peer Centrica have lost around 40% of their value since the firm cut its dividend a few years ago, so I would not want to risk a similar capital loss if I owned shares in SSE.
And thats why I believe mining giant BHP Billiton (LSE: BLT) is a better dividend buy.
Flexibility is key
BHP is attractive because of its flexibility. Rather than commit itself to an annual pre-defined dividend distribution, BHPs payout is flexibly based on the level of profits the company earns in a particular year. This year, analysts believe the shares will yield 4.3%, but theres also the chance of special dividends if the firm exceeds forecasts. Management has promised to distribute50% of underlying earningsas dividends.
According to a quarterlytrading update issued by BHP today, the business is on track to hit City forecasts for the full-year.
Our performance in the first quarter keeps us on track to deliver 7% volume growth in the 2018 financial year, said chief executive Andrew Mackenzie. We manage the portfolio for value and returns. Our transition to lower-cost, high-return, latent capacity projects is delivering results, with first copper production achieved from the Los Colorados Extension project at Escondida and Olympic Dams Southern Mining Area during the quarter.
Higher output and broader margins will likely mean a hike in the dividend payout for next year as the company meets its 50% payout target.
All of this excludes any positive impact fromactivist hedge fund Elliott Advisors, which has been running an aggressive campaign against BHP to overhaul its strategy and boost returns to shareholders. With Elliott owning 5% of the company, Im inclined to believe that the fund will produce the best possiblereturns for investors.
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Overall, BHP looks to me to be a better buy than SSE because of the company’s flexible dividend policy and involvementof Elliott, which is set on improving investor returns.
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