Dividend stocks are ones that pay out a regular income in the form of a dividend to shareholders. The dividend yield is a ratio to calculate the proportion of income received annually relative to the share price. For most investors, a higher yield is preferred to a low one. Here are two dividend stocks that I would consider buying at the moment.
Giving me the energy to invest
First up is SSE (LSE:SSE). The company operates as a utility business in the energy sector, mostly servicing the UK and Ireland. This already ticks a box for me as a sustainable dividend stock, as utility companies tend to have a low-risk business model that isn’t overly exposed to the general state of the economy.
SSE has a dividend yield of 5.34% and I think this yield can remain elevated thanks to the 2020/21 results just out. The report showed that SSE is in a good state. Impressively, adjusted profit after tax was £957m, up from £909m the year before.
Even though liabilities grew due to the pandemic, net assets actually grew to £6.6bn from £4.9bn the previous year. This was in part due to it’s disposal programme, which generated cash proceeds of £1.5bn. A healthy net asset figure is a key metric I look at to see whether the business can sustain paying out funds in the future to shareholders.
A risk here is that due to the tight regulation of Ofcom, SSE has to abide by price caps charged to customers. Dependent on future changes to the price cap, SSE might be restricted on the profitability potential.
A sustainable dividend stock
Another dividend stock with a yield above 5% is Aviva (LSE:AV). In a similar way to SSE, I see the life insurance company as having a sustainable business model. Insurance will continue to see steady demand for the future, and is in no way a passing trend or phase.
Aviva currently offers me a dividend yield of 5.05%. It also offers me the potential for share price appreciation. As my colleague Harvey Jones flagged last month, the share price is up 57% over a one-year period.
One reason for this strong share price move is due to higher inflows into the savings and retirement part of the business. In a Q1 trading update, sales in this area were up 23%. The company is also benefiting from cash inflows following the sale of several non-core businesses, with an expectation of generating £7.5bn once completed. A high cash figure aids any future payments to shareholders for this dividend stock.
Once risk is that the sale of several business areas (including Italy, Poland, and Singapore) might damage long-term growth prospects. Short-term liquidity is good, but if this hamstrings the business growth further down the line then it could be a costly mistake.
Overall, both SSE and Aviva are dividend stocks that I’m considering buying due to strong outlooks and high dividend yields.
