Diploma (LSE:DPLM) has been growing its dividend at an average of 12% per year over the last decade. That’s why it’s the FTSE 250 stock I’d buy today to boost my annual income.
With a price-to-earnings (P/E) ratio above 40, the stock isn’t especially cheap. But I think that the company’s growth more than justifies the high price tag.
Diploma is a distributor of industrial components. It divides its operations into three divisions: seals, controls, and life sciences.
With industrial components, there’s a risk that the business could struggle in an economic downturn. But the company is protected from this in an important way.
Diploma focuses on components that have two features. The first is that they are inexpensive and the second is that they are indispensable.
This means that customers are likely to continue buying Diploma’s products even if growth spending subsides. This gives the business some protection against the effects of a recession.
Beyond that, Diploma has been growing impressively. It has increased its revenues by an average of just under 12% per year for the past decade.
The company’s CEO also thinks that this can continue. As a result, I think that this is a business growing at an impressive rate that is well-protected from an economic downturn.
Over the last 12 months, Diploma has distributed 45p in dividends per share. At today’s prices, that’s a dividend yield of 1.8%.
To generate £100 in annual passive income, I’d need 222 shares. And with the Diploma share price at just under £25, that would mean an investment of £5,550.
That’s quite a lot. But fortunately for me, there’s more to Diploma’s payments to its shareholders than meets the eye.
At 1.8%, Diploma’s dividend yield is hardly eye-catching. But the company’s dividend growth still makes this an interesting proposition for me.
The company’s growing dividend means that the amount I could expect to receive from my shares will go up over time. As such, the number of shares I’d need to reach a £100 annual payout will decrease.
There’s another advantage to the growing dividend, too. The more the company’s dividend grows, the more shares I would acquire when I reinvested my dividends.
In other words, there’s a double benefit to Diploma’s dividend increases. The number of shares I would need goes down and the rate at which I could acquire more shares goes up.
A FTSE 250 stock to buy
If I were looking for £100 in annual passive income, Diploma would be the FTSE 250 stock I’d buy. I own the shares in my portfolio and I intend to buy more over time.
The stock isn’t the most obvious choice for investors seeking passive income. It’s also important to note that there’s no guarantee that Diploma’s dividend will continue to grow at the rate it has been.
The underlying business looks strong to me, though. And this, in my view, gives me the best chance of getting a strong return on my investment over time.
The post I’d buy 222 shares of this FTSE 250 stock for £100 in annual passive income appeared first on The Motley Fool UK.
Stephen Wright has positions in Diploma. 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 2022