Here's why SSE's (LON:SSE) dividend payment is in danger

SSE (LON:SSE) is engaged in producing, distributing and supplying electricity and gas, as well as other energy-related services to homes and businesses in Great Britain and Ireland. Its segments include Networks, (electricity distribution, electricity transmission and gas distribution) Retail (energy supply, enterprise and energy-related services), and Wholesale (energy portfolio management and electricity generation, gas storage and gas production)

The group is attractive to investors because of its sizable 8.36% rolling dividend yield, although not for a lot else, judging by the group's one-year relative strength of -11.1% and recent uninspiring share price chart:

But how safe is SSE's dividend? One of the quickest ways to check is by using the dividend cover (earnings per share divided by dividend per share). Dividend cover is the inverse of the dividend payout ratio. Dividend cover of two times or above is strong. Anything below one and a half times - as is the case for SSE - should be stirring us to investigate in more detail.

Calculating Sse’s dividend cover ratio 

A low level of dividend cover means that a small decline in earnings could quickly make your dividend payment a thing of the past. With that in mind, let’s take a look at SSE’s dividend cover.

We can get all the information we need to see if SSE has an adequate level of dividend cover from the group’s StockReport. The group’s trailing twelve-month earnings per share is 10.8p and its trailing twelve-month dividend per share is 95.6p. 

Divide the former by the latter and we get a paltry trailing twelve-month dividend cover for SSE of 0.11. This is below the 1.5 times cover limit that marks the point at which we should do some further digging on dividend sustainability and safety. Even if we take SSE's normalised EPS figure of 111.8p, we get a dividend cover of 1.17 - still below the 1.5 cut-off level. What's more, brokers are forecasting a decline in earnings in the years ahead, which suggests the pressure on SSE's dividends will only increase.

Income investing: what you need to know

For many investors, dividends are a vital part of their long-term strategy. That's why we have created a variety of income-focused stock screens, such as the Best Dividends Screen, to identify promising candidates for income portfolios. Take a look and see if any of the qualifying stocks might be worthy of further research.

If you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.