I’d buy this share for monthly passive income in 2023

Gabriel McKeown identifies a new FTSE 350 share that he’d add to his investment portfolio for regular passive income next year.

| 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.

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.

sdf

I often mention my desire to build a portfolio that can deliver consistent passive income. This is a great way to diversify from traditional growth and value holdings. The ability of a small number of high-quality holdings to provide an income month after month can make a big difference during those tough market conditions. 

Growth stocks can lose momentum. This results in the share price falling, leaving just two options: hope for a recovery or sell the position. Likewise, a value investment may take years before the market capitalisation catches up to its true value. This is why income holdings can be of great benefit to my portfolio. Regardless of the share price, dividends should continue to be paid each month or quarter.

What I’m looking for

Despite how simple this strategy may appear, it involves looking at several factors to find a consistent income-generating holding. I’m looking for simple, high-quality companies whose business models aren’t difficult to understand and who I can trust to pay a dividend continually. For me, a high-quality business will generate plenty of cash flow, have strong earnings growth, and sensible profit margins.

Should you invest £1,000 in Tesco right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco made the list?

See the 6 stocks

Of course, it’s essential not to forget the dividend itself. For this reason, I have a few requirements when it comes to the yield being offered. I want to see a dividend that has been paid and grown consistently for many years. This track record is vital, as I want to be able to rely on this company’s dividend for many years.

My latest find

A  prime example of what I’m looking for is Drax Group (LSE: DRX). It is a UK-based company focused on renewable energy generation. It has experienced impressive share price growth over the last two years, growing over 61% in 2021. However, it is now down almost 7% this year and over 32% from its peak at the beginning of 2022. Despite this, the price-to-earnings (P/E) ratio is currently 25.5, although it is forecast to reach just 6.9 by next year.

Created with Highcharts 11.4.3Drax Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

The underlying fundamentals are also strong, with good levels of free cash generation and reasonable profit margins. Additionally, turnover is forecast to grow by 26% next year, and earnings per share (EPS) is expected to increase by 267%. These impressive forecasts support the idea the current dividend is secure and likely to grow further.

The current yield of 3.3% has been paid consistently for the last 16 years and has grown for the previous five. The dividend cover ratio of over one suggests that this level can be paid comfortably with current EPS. The dividend is also forecast to grow by over 11% next year, reaching 3.8%. This new level can still be comfortably covered by EPS, giving a dividend cover forecast of just under four.

My conclusion

It is essential to note that the current share price level is relatively high, so if the expected EPS and turnover growth aren’t achieved, the current price-to-earnings ratio could make the stock overvalued. Also, the current debt level is almost 70% of market capitalisation, so I want to keep an eye on these.

Nevertheless, this is an excellent opportunity to access a consistent dividend yield. I will add the company to my portfolio once I get the necessary funds.


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.

Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Small cap sticky note
Investing Articles

Just released: July’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

2 brilliant FTSE 250 stocks hitting record highs

Up around 7% in 2025, the FTSE 250 index is in decent form. But some of its members are faring…

Read more »

Google office headquarters
Investing Articles

This S&P 500 firm just crushed Q2! Time to buy the stock?

Alphabet (NASDAQ:GOOG) continues to trade at a discount to the S&P 500 index. Our writer asks whether it's worth considering…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

How much is needed in a SIPP to aim for nearly £20,000 of passive income a year?

Our writer explains how a Self-Invested Personal Pension (SIPP) could be used to target a five-figure income for later in…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

I think my favourite real estate investment trust just got better in value

This investment trust's share price has been on a slide over the past five years. Here's why I think the…

Read more »

Female Tesco employee holding produce crate
Investing Articles

£10,000 invested in Tesco shares 1 year ago is now worth…

Tesco shares have been seriously outperforming the FTSE 100 index in 2025. Is there more to come or is all…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Up 20% this year, can results keep the Centrica share price going?

The past five years have seen a terrific upwards run for the Centrica share price, but a warm summer means…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Here’s how investors could target £11,384 of passive income from 1,549 shares in this FTSE 250 dividend gem!

This FTSE 250 advanced materials firm delivers a very high dividend yield that could generate a big annual income stream…

Read more »