Finding quality passive income stocks can be tricky. One solid dividend stock I believe investors should consider snapping up is Diageo (LSE: DGE). Here’s why.
Cheers!
Diageo may not be a familiar name in itself but I’m pretty sure most people will have encountered the international spirit maker’s brands. Some of these include Smirnoff, Guinness, Johnnie Walker, and Baileys. With roots stretching back to the 1700s, the business has been around for a long time!
As I write, Diageo shares are trading for 3,117p. At this time last year, they were trading for 3,598p, which is a 13% drop over a 12-month period. Market volatility has thrown up many opportunities to buy quality dividend stocks, like Diageo.
A dividend stock with risks to bear in mind
Let’s face it, all stocks come with risks. So let’s get the bearish aspects out of the way. To start with, Diageo is at the mercy of macroeconomic headwinds, including soaring inflation and rising interest rates. Due to the former, costs are rising for businesses, especially when it comes to production and supply chain. When costs rise, profits are affected and payouts could be dented, unless the company can pass them on to customers.
Next, Diageo could see demand for its products weakened due to higher costs of living. Alcohol isn’t an essential, and people seem to be more focused on being able to pay for their food, energy, and mortgages. This is something I’ll keep an eye on, especially as there doesn’t seem to be an end in sight to the current macroeconomic woes.
Why Diageo shares could boost passive income
Moving to the bull case then, Diageo possesses some distinct characteristics that make me believe it is an excellent dividend stock. I’ll break them down.
Firstly, it has superb brand power and a mammoth footprint. Brand power is key in its respective market. Consumers habitually buy Diageo’s brands and this helps the business grow, the money flow in, and in turn, translates into juicy dividends. As for footprint, the business pretty much operates worldwide. I’d be hard pressed to travel somewhere and not find a Diageo brand on offer. This is positive as it can boost performance too.
Another aspect for Diageo that may be overlooked is the fact that the business seems to generate high margins. This is great for a business when it is looking to reward investors as profits are boosted nicely. This is evident from the years of trading information readily available.
Finally, as with any dividend stock, the yield is important. Now a dividend yield of 2.6% may not seem high. However, Diageo has a good track record of paying out consistently and growing dividends. I’m more interested in that compared to a high yield that is unsustainable. It is worth remembering dividends are never guaranteed.
Overall, Diageo look like a great passive income stock that I think investors should consider as part of a diversified portfolio of stocks. There’s lots to like and market volatility right now means the shares look even more attractive at current levels.
