Owning stocks can be a great way of generating income while doing absolutely nothing. But not all shares are equally good for this.
In my view, the most desirable stocks to buy are ones that shares in businesses that can reliably generate profits without huge outlays. And one FTSE 100 company looks exceptional to me.
Passive income squared
Running hotels is expensive and labour-intensive. Neither is a good feature, but InterContinental Hotels Group (LSE:IHG) operates a franchise model that protects it from both of these issues.
The company doesn’t own the hotels in its network. That might seem like a bad thing, but owning assets like buildings inevitably leads to costs for repairs and maintenance.
Instead, individual operators sign up to be part of the firm’s network – and pay a fee (usually a fixed percent of revenues) to do so. In return, they get support from IHG’s infrastructure and marketing.
That means the firm leaves the expensive and difficult bits of running hotels to someone else. And since InterContinental Hotels’ cut comes from top-line revenue, it’s protected from rising costs like energy and wages.
In other words, this is a business with something close to a passive income model. Someone else does the work and returns a fixed part of the proceeds back to the company.
Risks
I really like the business model InterContinental Hotels Group operates. But with a dividend yield of 1.5% the stock is clearly priced for growth – and there’s a risk that this might not arrive as expected.
Its business depends on strong travel demand. And there are signs that a weakening economy might dampen this in the near future, making the stock look expensive.
There are a couple of things worth noting, though. The first is that the company has shown a decent ability to come through cyclical downturns in a position of relative strength.
The most obvious example is Covid-19, where travel restrictions hit travel demand hard. Despite this, the company pays a higher dividend and has a lower share count than before the pandemic.
This is largely due to the company’s business model. In a downturn, revenues might fall, but without the costs of running the hotels, the long-term damage to the company is limited.
Dividend growth
A 1.5% dividend might not look like a lot. But an increasing dividend and a decreasing share count mean I think this could be more attractive over the long term than it first seems.
The company has 300,000 rooms in its pipeline to add to its network. A new mid-price brand also indicates the company is targeting long-term growth despite current challenges.
I see InterContinental Hotels as the ultimate passive income stock. It collects cash from hotels without having to run them and provides them to investors who do nothing other than own the shares.
It’s no secret that the FTSE 100 company has a powerful business model. But I think investors with a long-term view should seriously consider making an investment and letting it grow over time.
