I’m always looking for stocks to buy now that can provide me with income later in life. And I think that FTSE 100 stock Diploma (LSE:DPLM) might well fit the bill.
The stock isn’t an obvious choice for for passive income – it has a low dividend yield and the share price is up 26% since the start of the year. But I think investors should give it careful consideration.
The company
Diploma is one 2023’s new entrants into the FTSE 100. The stock has been a FTSE 250 constituent, but its results have seen it grow to a size where it has displaced some of the bigger businesses.
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The company is a conglomerate, focused on distributing industrial components. While the business had been growing steadily, things have really kicked on in the last couple of years.
Since Johnny Thompson took over as CEO, revenues have grown from £538m in 2020 to £1,013 last year. Operating profits and earnings per share are also up significantly.
The reason is that Diploma has become more aggressive with its acquisition policy. This can be risky – the danger of overpaying for an acquisition is real – but so far the result has been faster growth.
Right now, the stock has a dividend yield of 1.6%. That’s not high, but I think this could turn into something significant over the next few decades as the company continues to grow.
Investment options
With £10,000 to invest and a 30-year time horizon, I could buy 280 shares in Diploma or invest it in a government bond. The yield on UK government bonds with a 30-year duration is currently 4.1%.
If I chose the bond, I could expect to get £410 per year, which I could reinvest if I didn’t need the money immediately. Reinvesting at 4.1% each year would result in a payment of £1,314 in year 30.
Investing £10,000 in Diploma would get me 280 shares, which currently yield £160 per year in dividends. But that return has been increasing and I expect the growth to continue.
The company’s dividend has been growing at 11% per year. While that’s unlikely to continue indefinitely, 7% – slightly above the 4%-6% achieved by the likes of Diageo – seems reasonable to me.
If that’s right, then the distribution in year 30 would be £1,154. And by reinvesting the dividends along the way, I could hope to boost this to around £1,704 – or £142 a month.
Investing for retirement
At today’s prices, I’d choose Diploma shares over a government bond for passive income in retirement. But there’s an important caveat, which is that I’m looking 30 years into the future.
If I were looking with a shorter time horizon – something more like 10 or 15 years – I’d choose the bond. There are two main reasons for this.
The first is that the returns from the bond are less risky. The second is that Diploma needs time to grow its earnings and provide that higher return.
For an investor like me, though, with time to wait before I might need the extra income, I think it’s better to buy stocks. And Diploma looks like a great choice, in my view.
