Owning shares that pay dividends can be a handy and practical way to earn passive income. While a lot of investors focus on big FTSE 100 payers like BP and Vodafone, there are quite a few income shares in the FTSE 250 index of small- and medium-sized companies I would happily own.
If I wanted to target £300 each year in passive income (as part of a wider, diversified portfolio) and had spare cash to invest, here is one I would buy now.
4% yield
The FTSE 250 share in question is Hollywood Bowl (LSE: BOWL). Your first reaction on reading that might be, “what, who goes ten-pin bowling these days?”
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The answer is: quite a lot of people.
On top of that, the company is branching into mini golf. While those are not the leisure choices of everyone, there are plenty of customers and the company has been performing strongly in recent years.
Revenues last year grew 11% and are now two thirds higher than they were in 2019. Basic earnings per share slipped 9%, but still covered the dividend 1.3 times over.
2024 has started well too, with revenues in the first half growing 8% year-on-year and profit after tax up 5%.
21% interim dividend growth
That strong performance saw Hollywood Bowl grow its interim dividend last month by a whopping 21%.
If it raises the full-year dividend at the same rate (which it may or may not), the full-year payout per share should be around 17.6p. If I bought 1,695 shares today, that would hopefully mean I earn £300 in passive income annually in the form of dividends.
On top of that, given the ongoing strength of the business, I think the dividend could grow further in future.
That is before even considering the capital appreciation prospects. Over the past five years, this FTSE 250 share has moved up 41%.
Weighing risks and possible rewards
Past performance is not necessarily a guide to what will happen next, of course. While the share price is 40% higher than it was five years ago, during that period it fell sharply when the pandemic led to bowling lanes being closed.
The risk of another unexpected event like that hurting revenues badly cannot be discounted. Another risk is a weak economy leading to lower leisure spending.
But Hollywood Bowl has a proven business model that has delivered long-term growth and significant profits. That could help it fund the dividend in future.
Its competitive advantages include a network of locations, strong brand recognition and economies of scale versus local single-site operators. I see it as a quality company with large space for future growth and the offering to capitalise on that.
So when weighing the risks, I consider the current price-to-earnings ratio of 15 as a reasonable valuation and would gladly snap up this FTSE 250 share.
