As we begin to leave a tough 2022 behind, I am looking for new investment opportunities to generate consistent passive income for my portfolio in 2023. Finding a good quality company that can provide a stable dividend, year after year, is essential to achieving this goal. I want to find a share that has potentially underperformed in the last year but still has strong underlying fundamentals. It is this combination that could present a great income opportunity.
In the past, I have taken a fairly simplistic approach to finding income-generating opportunities within the market. This often involves picking shares with the highest dividend yields and then holding for years at a time. The hope is that these gains will steadily compound.
However, this has not always been the best approach, as share price falls can sometimes erode passive income. I now try to find shares that are already low priced.
My new approach
My new focus is on finding high-quality companies that have also suffered a fall in share price. This may mean they are less likely to experience further declines. For me, a high-quality company is one with steady earnings growth, the potential to generate significant free cash flow, and low levels of debt.
I am also looking for shares whose yield is forecast to grow considerably in the next year. This will amplify the compounding effect of the dividend. If a company can continually increase its dividend year on year, it can steadily boost my monthly passive income without any changes to my investment strategy.
For that reason, I have been looking at Mondi (LSE: MNDI), a company that produces packaging and paper products. The share has suffered considerably over the last year. The price is down over 17% in 2022 and down 26.5% from its peak in 2021. As a result, it is now trading at a price-to-earnings (P/E) ratio of 11.3. It is forecast to reach just 8.9 by next year.
Mondi is tempting as it offers a yield of 3.6% and has paid a dividend consistently for the last 15 years. It also has a dividend cover ratio of 2.4, indicating that it can comfortably continue to pay this dividend from its earnings per share (EPS). This level of cover is a good indicator of the company’s underlying fundamentals.
However, it’s important to note that the dividend level has fallen following weaker performance compared to pre-pandemic levels. The company’s turnover and profits are still below 2019 levels, despite a significant rebound from the 2020 financial year. It will be important to watch these fundamentals, as the company’s underlying performance needs to recover fully for the dividend to keep growing.
I think Mondi presents a good passive income opportunity for my portfolio, as it provides a consistent dividend yield in a company with strong underlying fundamentals. However, I would like to wait until the beginning of 2023 before adding the share to my portfolio.
The post I’d buy this share in 2023 for monthly passive income appeared first on The Motley Fool UK.
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.
Motley Fool UK 2022