A dividend stock I’d buy in 2023 for passive income

Gabriel McKeown identifies a dividend stock in the FTSE 350 that he’d add to the income-generating portion of his portfolio next year.

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A primary focus within my investment journey has been the search for dividend-paying stocks. I’ve always liked the idea of investing in a quality company that would grow my capital. Especially while paying me a regular income. Over the years, I have focused on finding new opportunities for long-term passive gains via a steady and growing yield.

Each year, I look for new opportunities to add to the income-generation portion of my portfolio. I find this approach of thinking about the year ahead encourages a long-term approach to these holdings. I aim to gain an element of certainty from these investments. This allows me to invest and then all-but-forget, secure in the knowledge that my dividends should grow (although that is never guaranteed). The goal is to generate a substantial return without needing further intervention.

Past dividend mistakes

However, it is not always as easy as it sounds, and I learnt this the hard way in the past. I used to pick sky-high yields and banked on this meaning a steady stream of future income. But if a share price starts to fall, the losses could be bigger than the income I get. So that is a bad long-term strategy.

What do I do instead now? I hunt down companies that have a more modest dividend yield but also enjoy solid underlying fundamentals. I make it easier for myself (and much more efficient) by using an index filter. This looks for opportunities based on my key criteria. When I tried to do this manually, I was much less successful at finding the right kind of stocks.

My latest dividend find

A company that appeared within my filter was Bodycote (LSE: BOY), a supplier of metal heat treatments. The share price has been volatile over the last few years, rising 16.1% in 2021 before falling almost 40% in 2022 so far. Despite this, the current dividend yield of 3.9% drew my attention to the company, especially as this dividend has been paid consistently for the last 30 years.

Additionally, this yield is forecast to grow to 4.1% next year and has been growing consistently for 12 years. I am also encouraged by the forecast dividend cover of 1.9, which indicates that this new expected yield can be covered comfortably by earnings per share (EPS). The underlying fundamentals are also strong, with solid profit margins, good cash generation, and reasonably low debt levels.

Of course, it is important to note that both turnover and bottom line profit fell considerably in 2020. And despite a strong recovery in 2021, it hasn’t returned to pre-pandemic levels. This may explain why the stock saw such a strong price reversal in 2022 as further improvements are needed before it gets back to its pre-2020 performance. This will be important to watch because if it falters, the dividend yield growth will likely reduce.

Nonetheless, I believe Bodycote presents an excellent opportunity to access a solid dividend yield that’s stable and growing. However, I am keen to monitor this share over the next few months for further improvements, intending to add it to my portfolio in 2023.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has recommended Bodycote. 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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