For most investors, building a successful strategy for receiving passive income isn’t just about buying stocks with the biggest dividend yields today. Those who generate long-term wealth buy UK shares that can sustainably grow shareholder payouts over time.
Standard Chartered (LSE:STAN) is one such company on my watchlist today. Its 2.4% dividend yield for 2023 isn’t the biggest. But I expect the annual dividends to rise strongly as profits from its emerging markets take off.
City analysts share my upbeat view for the next couple of years at least. They expect last year’s full-year reward of 18 US cents per share to rise more than a quarter year-on-year in 2023, to 23 cents.
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A further impressive rise is anticipated for 2024, too, to 32 cents. This pushes the yield on Standard Chartered shares almost a full percentage point higher, to 3.3%.
Here’s why I think the FTSE 100 bank could be an excellent passive income share for years to come.
Cash machine
Returning surplus cash to its shareholders has been a priority for StanChart after the Covid-19 crisis in 2020 sapped shareholder payouts. Indeed, last year’s 18-cent reward was up an impressive 50% year on year.
The business has also been committed to regular share buybacks, and last week announced plans to repurchase another $1bn worth of shares following strong first-half results, more of which I’ll talk about in a moment.
Standard Chartered’s strong balance sheet suggests it could continue returning boatloads of cash to shareholders. The bank’s strong cash generation means its common equity tier 1 (CET1) capital ratio stood at 14% as of June, right at the top of its target range.
Strong dividend cover also gives extra strength to analysts’ dividend projections over the next two years. Predicted payouts are covered between 4.8 times and 5.5 times by estimated earnings during the period. Any reading above two times provides a wide margin of safety for investors.
Forecasts upgraded
Earnings are tipped to lift off at StanChart over the next couple of years. This is thanks to higher interest rates and soaring financial product demand in the bank’s core Asian and African markets. It currently makes around two-thirds of its income from Asia
Annual rises of 25% and 20% are forecast for 2023 and 2024 respectively. But I think these numbers could be upgraded following blowout first-half trading. Net income rose 14% to $9bn from January to June, and underlying pre-tax profit jumped 29% to $3.3bn.
Rising loan impairments are a threat to banks like this. The FTSE firm booked another $172m of bad loan charges for the first half.
But the impact of this on profits could still be greatly outstripped by the rate at which revenues are growing. Last week the company actually hiked its income forecasts for 2023 following that solid first-half result.
Standard Chartered is showing it has what it takes to capitalise on the banking boom in emerging markets. And as personal income levels in its territories rapidly grow profits at the bank should follow suit. I think it will prove a top stock to buy for long-term passive income.
