A FTSE 100 stock that could create generational passive income

Stephen Wright thinks buying Diageo shares with the dividend yield at a 10-year high could be a great way of earning passive income for future generations.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

happy senior couple using a laptop in their living room to look at their financial budgets

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Warren Buffett once said that: “Someone’s sitting in the shade today because someone planted a tree a long time ago.”  Good for them, but I don’t want shade – I want passive income.

Fortunately, something similar is true of dividend stocks. Good ones distribute cash to shareholders for years, great ones are able to do it for generations. 

Long-term returns

Since 1994, the Diageo (LSE:DGE) share price has gone from £4.60 to £25.35. That’s a 429% increase, but the real story is the income the stock generates for investors. 

Over the last 12 months, the company’s paid out 82p per share in dividends. For investors who bought the stock 30 years ago, that’s an annual return of around 18%. 

I’d have been too young to buy the stock back in 1994. But I have a two-year-old and I can make investments now that can generate passive income for him in the future. 

The dividend yield for investors buying the stock today is 3.2%. But Diageo has increased its distributions every year for the last 37 years and I think it can keep going for a long time yet.

Risks

Diageo’s brand portfolio has leading products in several categories. On top of this, its scale is unmatched, making it extremely difficult for smaller competitors to disrupt its business.

There are however, risks for investors to consider. And the biggest is probably consumers switching to cheaper alternatives. 

Over the last 30 years, wage increases haven’t been keeping pace with inflation. As a result, household budgets are under more pressure than they have been.

Despite its unmatched strength, Diageo’s brand portfolio’s firmly tilted towards the premium end of the market. This increases the risk of consumers trading down.

A Dividend Aristocrat

Despite the risks, I think Diageo can create generational passive income for investors. The company has grown its dividend through the Great Financial Crisis, Brexit, and Covid-19.

Through any 30-year period, there are challenges for businesses. But the best ones are able to keep moving forward even when things are difficult. 

Diageo has done this as well as anyone. Its success hasn’t just been due to falling interest rates and low inflation – the company’s distinctive strengths have proved durable.

I think this means there’s more to come in terms of dividen growth. And with the stock at a 52-week low and the dividend yield at its highest for a decade, I’m looking to buy it. 

Payout growth

The last 10 years haven’t exactly been easy for Diageo – or businesses in general. Despite the Covid-19 pandemic, the company’s increased its dividend by an average of 4.7% a year.

If this continues, the dividend per share will reach £2.93 in 2054 – a 12% return at today’s prices. And that will be something worthwhile for the next generation.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Diageo Plc. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »