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Here’s how I’d find the best shares to buy now to make a growing passive income

Peter Stephens
·3-min read
A person holding onto a fan of twenty pound notes
A person holding onto a fan of twenty pound notes

While inflation is currently relatively low, the importance of obtaining a growing passive income could increase over the coming years. Monetary policy has been accommodative for many years, and may cause a faster-rising price level over the long run.

As such, buying dividend shares with affordable shareholder payouts, the right strategies to deliver growth and that have the capacity to benefit from industry growth trends could be a sound move. It may produce a rising income to complement a high yield.

A low dividend payout ratio

Although a low dividend payout ratio doesn’t guarantee a fast-paced rise in passive income, it suggests that a company may be able to afford a larger shareholder payout. It’s calculated by dividing dividends paid by net profit to give a percentage figure. Less than 100% shows the company paid a lower amount than its net profit as a dividend.

Of course, a company may have a low payout ratio for reasons including a strategy of reinvesting for growth. This may mean its capacity to raise dividends may be limited. However, over the long run, a business with a very affordable dividend may have greater capacity to increase shareholder payouts without necessarily requiring a rapid rise in earnings to pay for it.

A strategy aimed at growing a passive income

The decision to pay a larger dividend rests with company management and directors. Therefore, it could be a prudent move to analyse their strategy with regard to obtaining a growing passive income. For example, they may have a track record of increasing dividends at a fast pace that could suggest, but not guarantee, that a similar strategy may be used in future.

Furthermore, a company with a sound growth strategy that can lead to rising profitability may be able to reward shareholders via a larger dividend. As such, it can make sense to analyse a company’s annual report and latest updates to gauge its overall strategy with regards to dividends, as well as its overall operations.

Investing in industries with growth potential

Clearly, companies that offer the prospect of a rising passive income are likely to require a growing bottom line to pay for it. As such, buying companies in industries with attractive growth opportunities could be a sound move. This doesn’t always mean companies operating within such sectors will deliver dividend growth. But it may provide a greater opportunity for them to do so versus industries with less upbeat prospects.

Through buying stocks with attractive long-term futures, it may be possible to increase the chances of obtaining dividend growth. This may lead to a rise in spending power in the coming years. And that could become increasingly important should inflation increase in response to a loose monetary policy.

The post Here’s how I’d find the best shares to buy now to make a growing passive income appeared first on The Motley Fool UK.

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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 2021