There’s a UK stock I think could be a great investment for long-term passive income. It’s Forterra (LSE:FORT) – a manufacturer of bricks.
The company’s share price has been under pressure as a result of rising interest rates weighing on demand in the housing market. But the long-term prospects for the business look positive to me and I feel it’s worth investors doing further research.
Dividends
Forterra shares currently come with a 7.5% dividend yield, so a £13,000 investment in the stock would generate around £975 a year – or £81 a month – in passive income. But there’s a catch.
Rising interest rates and slowing demand in the UK housing market have been weighing on the company’s sales and profits. So dividends in 2024 are almost certain to be lower than 2023.
If the dividend is cut in half, that would mean a 3.75% yield at today’s prices. At those rates, a £13,000 investment would return £487 a year, or £40.50 a month.
One way to boost passive income returns is to reinvest the dividends. If I did this at 3.75% a year for 30 years, I’d eventually have something returning £1,417 a year, or £118 a month.
There’s a risk the stock could undperform over the long term if things don’t look up for the business. But as I see it, the likely outlook is much brighter than this.
Outlook
Forterra shares have been coming through an unusualy difficult time. Interest rates don’t usually increase as sharply as they have done over the last 18 months and this has been a challenge.
As this subsides, I’m expecting demand in the housing market to recover. In fact, this seems to be happening with mortgage rates already even ahead of a Bank of England interest rate cut.
There’s also a long-term supply shortage in the UK housing market (which is why house prices keep going up). And with bricks being expensive to transport, local suppliers like Forterra should benefit.
On top of this, the firm’s costs should be lower going forward. With a new facility at Desborough producing bricks at lower costs, I’m expecting better profitability over the next few decades.
All of this means – I think – the business is going to pay out more in annual dividends on average over the next 10 or 20 years than in 2024. So I’m not just relying on reinvesting for future growth.
Staying the course
The building industry is highly cyclical, so I’m not expecting the journey for Forterra shares to be smooth. Over time though, I think the general direction for the company is up.
If the average dividend yield (based on today’s prices) going forward is 5%, then reinvesting would get me to £158 a month comfortably within 25 years.
Ultimately, I think the Forterra share price overestimates the short-term challenges. Passive income will be uneven each year, but I think there will be a lot of it for investors who stay the course.
