How I’d invest £20 a week to aim for £2,132 in annual passive income
Stephen Wright thinks a FTSE 100 dividend growth stock could be a great source of passive income for investors with a long-term outlook. The post How I’d invest £20 a week to aim for £2,132 in annual passive income appeared first on The Motley Fool UK.
Investing in the stock market can be a great source of passive income. One of the best ways of doing this, in my view, is by owning shares in companies that distribute their earnings as dividends.
There are a couple of ways of going about this though. While the best approach might vary from one investor to another, I know what I’d do if I were getting started today.
Growth
In general, my approach would be to look beyond stocks that have big dividend yields. There’s nothing wrong with these, but I think there are some underrated opportunities elsewhere.
Bunzl (LSE:BNZL) is one of the best examples of this. A 2.25% dividend yield isn’t exactly eye-catching, but buying the stock regularly for 30 years could earn me significant passive income.
Over the last decade, Bunzl has been increasing its distributions by an average of 6.8% a year. If that continues, a £20 investment today would return £3.23 in dividends 30 years from now.
That doesn’t sound like much, but doing that each week could result in something much more substantial. Investing £20 a week could build a portfolio distributing £2,132 a year.
Risks
The success of an investment in Bunzl shares depends a lot on the company’s future growth. And a lot of this comes from acquiring other businesses.
If opportunities become more limited, there’s a risk the firm might find it harder to keep increasing its dividend. But there are a couple of things worth noting.
One is that the company’s dividend only accounts for around 27% of its annual free cash flow. That means Bunzl’s ability to increase its dividend doesn’t depend on the business growing its revenues.
If acquisition opportunities start to become more scarce, I would expect the firm to return more of its cash to shareholders. So there’s already scope for growth built in.
Deceptive earnings
A trailing price-to-earnings (P/E) ratio of 19 means the stock doesn’t look like an obvious bargain. But Bunzl’s free cash flows are consistently higher than its net income.
This is because the company regularly has a number of non-cash expenses. These weigh on the firm’s accounting profits, but don’t involve cash leaving the business.
At today’s prices, the stock trades at a multiple of around 12 times last year’s free cash flows. That looks much more reasonable than a P/E ratio close to 20.
This, I think, is significant. Bunzl may not stand out as a particularly cheap stock, but I think a closer look reveals there’s more to the company than meets the eye.
A hidden FTSE 100 gem
Over the long term, I think buying Bunzl shares at today’s prices could be a really good move from a passive income perspective. Even £20 a week could result in something substantial over time.
So Bunzl’s stock continues to catch my eye. I think it has good long-term growth prospects and trades at an attractive price.
The dividend might not look like much, but I wouldn’t be too hasty to write this one off. There’s more to this one than meets the eye, in my view.
The post How I’d invest £20 a week to aim for £2,132 in annual passive income appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
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More reading
- 2 wonderful stocks I’d love to buy for my Stocks & Shares ISA before the April deadline
- With £1,000 to invest in March, I’d buy 32 shares of this FTSE 100 growth stock to aim for a million
- A brilliantly reliable FTSE 100 share I plan to never sell!
- Are Bunzl shares a long-term bargain?
- As the Bunzl share price wobbles on FY results, do I see a top passive income buy?
Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl Plc. 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.
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