Is now the time to buy Rolls-Royce shares for passive income?

I’m looking for the best dividend stocks to buy for long-term passive income. So should I purchase this FTSE 100 recovery stock for my portfolio?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Rolls-Royce (LSE:RR) share price exploded late last week following the release of incredible trading numbers. It’s led some to believe that the engineer could once again become a top stock to buy for passive income.

The FTSE 100 company hasn’t paid a dividend since before the pandemic. But City analysts expect Rolls to begin rewarding shareholders again as trading conditions improve and its balance sheet gets stronger.

Forward yields aren’t the biggest over the next two years. At Rolls-Royce’s current share price around 122p per share, dividend yields sit at 0.2% and 1.1% for 2023 and 2024 respectively. But should I buy the business on the possibility of robust long-term passive income?

Should you invest £1,000 in Angling Direct Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Angling Direct Plc made the list?

See the 6 stocks

A quick recap

Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Thursday’s full-year results have boosted investor hopes that Rolls-Royce is on track for a strong and sustained recovery.

During 2022, underlying revenues leapt 16% to £12.7bn. This was driven by a 25% jump at its Civil Aerospace division as the recovery in air travel boosted servicing revenues.

Rolls’ underlying profits soared to £206m last year from £36m in 2021 as a result. Free cash flow meanwhile rocketed to £505m, a big improvement on the £1.5bn outflow it recorded a year earlier.

Strong cash generation and asset disposals over the year helped net debt fall to £3.3bn as of December. This was down markedly from £5.2bn a year earlier.

“Signs of strength”

I’ve long been reluctant to buy Rolls-Royce shares because of its high debt levels. The massive liabilities it racked up during the Covid-19 crisis cast a cloud over how it would finance growth projects. As an investor, I was also concerned about how it would impact on future dividends.

So, naturally, the company’s strong improvement has eased my worries. Analysts at Hargreaves Lansdown have commented that “the leaner organisation has shown signs of strength” and added that “if cash inflows continue, the group will be able to keep pushing debt lower, going a long way in restoring our faith in Rolls’ ability to stand on its own two feet”.

Encouragingly, Rolls has predicted higher free cash flow of between £600m and £800m in 2023.

Not out of the woods

However, I haven’t joined the rush for Rolls-Royce shares in recent days. The business still has many challenges to overcome before a successful turnaround is in sight.

Just last month, new CEO Tufan Erginbilgic described the business as “a burning platform” that underperforms its competitors and has a history of making value-destroying investments. That’s according to a recent Financial Times report.

There are also things out of Rolls’ control that could derail its comeback. The travel industry recovery remains fragile as the global economy shrinks and Covid-19 continues in China.

Persistently-high cost inflation and supply chain issues could also damage profitability and further balance sheet improvement.

Hargreaves Lansdown has even suggested it remains too early to expect the engineer to start paying dividends again. It said that “given Rolls are still sporting a negative equity position — meaning liabilities outweigh assets — we’re sceptical about seeing any kind of dividend this year.”

Rolls-Royce is a FTSE 100 share I’m keeping a close eye on. But for the time being, I’d still rather buy other UK shares for passive income.

Should you buy Angling Direct Plc now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s a Warren Buffett share I’m considering adding to my portfolio!

Of the dozens of businesses Berkshire Hathaway has interests in, this is the Warren Buffett beauty I'm looking to buy…

Read more »

Happy woman commuting on a train and checking her mobile phone while using headphones
Investing Articles

7% and 13.4% dividend yields! 2 investment trusts to consider for a second income

Considering some dividend-paying investment trusts could be a great way to make a start on sourcing a second income in…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

275 shares to consider for a 9.64% Stocks & Shares ISA return!

Looking for ways to boost a Stocks and Shares ISA? Here's a top investment trust that's delivered huge returns since…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

£10,000 invested in NatWest shares 5 years ago is now worth…

NatWest shares have surged over the past five years, rewarding investors as if it were some sort of revolutionary artificial…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Does the GSK or AstraZeneca share price currently offer the best value?

The AstraZeneca share price has pulled back in recent months. Dr James Fox explores how the stock compares with pharma…

Read more »

Abstract 3d arrows with rocket
Investing Articles

Looking for FTSE 100 stocks? Here’s one I think could lift off in 2025!

Diageo's share price has dropped 15.3% in the year to date. Could it be about to become one of the…

Read more »

Front view of a young couple walking down terraced Street in Whitley Bay in the north-east of England they are heading into the town centre and deciding which shops to go to they are also holding hands and carrying bags over their shoulders.
Investing Articles

Up 15% in a month and still yielding 9.5% – this FTSE second income stock is on fire!

Harvey Jones says wealth manager M&G offers one of the most exciting second income streams on the entire FTSE 100.…

Read more »

Wall Street sign in New York City
Investing Articles

Looking for cheap stocks to buy? 2 reasons now might be the ideal moment!

Amid market turbulence, our writer has not been diving for cover, but actively on the hunt for stocks to buy…

Read more »