Yahoo Finance I’d buy 8,150 shares of this FTSE 250 stock to lock in £1,000 a year in passive income
When looking for dividend-paying stocks on the FTSE 250, I tend to avoid the flashy fly-by-night trending stocks. It might sound boring, but I prefer those stable and reliable picks with an established track record of consistent performance.
Essentially, I’m looking for a company in a dependable industry that can survive even the toughest of times, because who knows what the future may bring? I don’t want to be left holding shares in a company that pinned all its hopes on a market that never materialised.
With that said, here’s an income stock that ticks all those boxes for me.
Specialised investments
Ashmore Group (LSE: ASHM) is a London-based investment management firm with employees in 11 countries. The £1.3bn company manages over £4bn in assets and has served local and international customers since 1992, so I feel it ticks the ‘well-established’ box.
For over a decade now it’s paid out a consistent dividend of 16.8p per share on average, with a yield that has increased from 5% to 8.5%. Recently however, earnings have declined in line with the struggling UK economy. As a result, earnings per share (EPS) has fallen to 15p, resulting in a payout ratio above 100%. This could affect dividend payments in the long term if earnings don’t recover.
But for now, I wouldn’t consider that a critical issue. I’m already seeing strong signs of a market recovery in 2024, with the FTSE 100 recently hitting a new all-time high above 8,400 points. If the jobs market improves and inflation drops this year, I suspect capital markets will enjoy increased inflows.
Shares in the company are currently changing hands at £2 but based on future cash flow estimates, this is calculated to be overvalued by around 5%. However, while some might say Ashmore’s trailing price-to-earnings (P/E) ratio of 13.4 is high, it’s still below the industry average. Looking ahead, it’s forecast to increase to 15.2, so I wouldn’t expect any significant share price growth this year.
Fortunately, that isn’t a huge concern as the dividend payments help to ensure the investment remains profitable.
Calculating returns
Ashmore Group doesn’t have exceptional growth potential but appears to operate in a cyclical nature. Between 2009 and 2014, the share price increased by over 100%. Between 2016 and 2020, it enjoyed similar gains – before Covid hit. Now near the lowest price in over 10 years, I expect to see some growth in the next half-decade.
With that in mind, I’m working on an annual average price increase of 3.5% combined with the 8.5% dividend yield. If I were to buy 8,150 shares at £2 each, the investment could grow to £164,200 in 20 years. Assuming it maintains the average dividend yield, that would pay out just over £12,000 a year – or £1,000 a month in passive income.
This is just an example of one strong dividend share that I plan to buy in June. To avoid a single point of failure it’s best to spread an investment across several shares in various industries with high yields and low volatility. This would reduce risk while still aiming to achieve similar monthly returns.
The post I’d buy 8,150 shares of this FTSE 250 stock to lock in £1,000 a year in passive income appeared first on The Motley Fool UK.
More reading
Mark Hartley 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.
Motley Fool UK 2024
