Discover some of our contractors’ top picks for generating substantial passive income through stock investments below!
Dr Martens
What it does: Dr Martens designs and sells fashion footwear internationally, as well as a range of fashion accessories.
By Gordon Best. Dr Martens (LSE:DOCS) could be an interesting company for investors looking to grow passive income. In addition to the generous dividend of 6.74%, the company could be trading at a major discount. Issues in inventory and economic uncertainty have cut the stock in half in the last year. Dr Martens has a price-to-earning (P/E) ratio of 9.9 times, well below the average of 16.2 times. The discounted cash flow calculation suggests that the current price of £1.27 is 25% below fair value of £1.71.
The most recent earnings call saw management admit to mistakes made in the last year, outlining their strategy for growth. Although further issues are possible, I like what I see of this plan, with debt now under control, experienced management in place, and steady earnings growth. I like the look of the company for a long-term hold, with dividends paying me a healthy passive income.
Gordon Best owns shares in Dr Martens.
Howden Joinery Group
What it does: Howden Joinery is a vertically integrated kitchen supplier operating a network of depots across the UK and Europe.
By Zaven Boyrazian. Howden Joinery (LSE:HWDN) is a specialist designer of fitted kitchens allowing households to renovate and modernise. With the pandemic encouraging families to revamp, the group enjoyed riding significant tailwinds, resulting in double-digit growth.
Today, with rising interest rates, home renovation isn’t at the top of the priority list for most households — and that may be a risk if buying the shares now. However, with families now staying put for longer on the back of higher mortgages and falling prices, the long-term temptation to renovate is on the rise. At least, that’s what’s being reflected in the group’s latest trading update.
Revenues are still rising, and management has begun executing a new £50m share buyback scheme. And thanks to the business generating plenty of excess cash, the firm has raised dividends by almost 600% over the last decade – a trend that I believe can repeat itself moving forward.
Zaven Boyrazian owns shares in Howden Joinery Group.
M&G
What it does: M&G is the FTSE 100 investment fund and wealth management company that demerged from insurer Prudential in October 2019.
By Harvey Jones. Was I right to pile into M&G (LSE:MNG) shares in March? The risks were obvious at the time, but so were the potential rewards.
I find it hard to resist super-high income stocks, and M&G was certainly that, with a yield of 10.21% when I bought it. Yet I’ve learned the hard way how vulnerable double-digit yields can be, as fellow portfolio holdings Persimmon and Rio Tinto fell into that category before slashing theirs.
I took a chance on M&G because its board seems keen to reward loyal shareholders, hiking the 2022 dividend per share by 7.1% from 18.30p to 19.60p. In total, it returned nearly £1bn via dividends and share buybacks, despite capital generation turning negative (it’s expected to hit £2.5bn this year).
In June, M&G reported £400m of net client inflows in Q1 despite today’s volatile markets, while slashing headcount and costs should streamline the business and with luck, secure future shareholder returns.
It has a healthy Solvency II coverage ratio of 200%, even after paying the £310m final dividend announced in March.
M&G is forecast to yield 9.98% in 2023 and 10.1% in 2024, although as ever forecast payouts are not guaranteed. Those yields look ridiculously high, but the market expects them to come through. Even if they’re cut slightly, it should still prove a great passive income stock.
The share price is down 1.76% in the last year and looks good value trading at a modest 11.5 times forward earnings. It may not seriously recover until today’s economic rough patch is behind us, and that’s a risk if buying the shares now, but personally I’m happy to wait.
In the interim, I’ll reinvest any dividends that come my way to build up my position, and I might even buy more M&G stock over the summer.
Harvey Jones has positions in M&G Plc, Persimmon Plc, and Rio Tinto Group.
McDonald’s
What it does: McDonald’s is a fast-food company that serves 69m customers daily from 40,000 outlets in over 100 countries.
By Charlie Carman. McDonald’s (NYSE:MCD) offers a modest 2.1% dividend yield, but it’s a very reliable passive income stock. The company has increased shareholder distributions for 46 consecutive years, giving it Dividend Aristocrat status.
The group’s franchised model has served it well, reducing restaurant costs and ensuring free cash flow conversion of over 90%. Strong cash flow supports the sustainability of the dividend, which rose 10.1% in Q1 to $1.52 per share.
However, the company faces inflationary risks from higher labour and ingredient costs. In addition, the balance sheet isn’t as healthy as it could be. McDonald’s currently carries a $46.21bn net debt burden.
Nonetheless, it’s a highly profitable enterprise with a history of menu innovations that add sparkle to a simple business model. With plans for 1,500 net restaurant openings this year and a robust dividend history, I hope I can continue to look to the Golden Arches for regular passive income.
Charlie Carman owns shares in McDonald’s.
Phoenix Group
What it does: This FTSE 100 company is a giant of the insurance sector; previously, it had been a closed-book consolidator.
By Dr James Fox. Phoenix Group (LSE:PHNX) is one of the few shares I hold almost exclusively for dividends. That said, by buying more of this stock during the dip, I’m hoping for some share-price gains.
The dividend yield currently sits at 9.1% as I write, making it the second largest on the FTSE 100. The coverage ratio was 1.6 for 2022, suggesting the dividend remains safe for now. This figure is down from 1.93 in 2020 and1.62 in 2021.
Naturally, I’d prefer to see coverage higher – around two. However, insurance companies tend to have fairly regular cash flows, and Phoenix Group is no different. Steady business should support the yield’s sustainable.
Obviously, inflation has caught out insurance firms over the past year, and it could continue doing so. However, I’m bullish on Phoenix Group. It’s got 14m policyholders, and chief executive Andy Briggs wants to see cash generation reach £1.5bn by 2025. It’s still a growing business.
Dr James Fox owns shares in Phoenix Group Holdings.
