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An unlikely FTSE share I’d buy for dividend income

Young female business analyst looking at a graph chart while working from home
Young female business analyst looking at a graph chart while working from home

A primary goal of my investment journey has been the search for dividend-paying FTSE stocks. I am enticed by the idea that I could invest in a simple company that could grow my capital over time while paying me a regular income.

This approach is far less intensive than the active management and research that is often needed for growth investing. I think this somewhat passive approach is one of its greatest appeals. Therefore, I have begun to focus on finding as many new opportunities for long-term passive gains as possible.

Previously I tried to buy the highest-yielding shares and hoped this would generate consistent income over the years. Unfortunately, if a company’s share price begins to suffer, this could mean capital losses offset all the passive income. Consequently, this wouldn’t achieve a great deal in the long run. Furthermore, I realised that setting overly high dividend expectations meant that I was excluding a lot of high-quality opportunities.

My new strategy

Instead, I now look for companies that combine a reasonable dividend yield with strong underlying fundamentals. This means that I am more than happy to invest in a share that may not be offering the highest yield currently, but that is steadily growing its dividend year on year. And I can gain some certainty from these investments by focusing on high-quality companies. This allows me to invest and then almost forget, secure in the knowledge that my dividends should slowly compound into a more substantial return without the need for further intervention.

This is easier said than done, and a successful dividend investing strategy isn’t always straightforward. To make the share selection process more efficient, I have used an index filter that scans the entire market and looks for opportunities that meet all of my essential characteristics. This approach is significantly more efficient than my previous attempts at manually finding high dividend payers, which didn’t always fulfil my other fundamental requirements.

Latest Opportunity

Pursuing this dividend goal, I was drawn to Halma (LSE: HLMA). The company operates 44 different individual businesses within the electrical equipment sector. Its share price performance has been extremely impressive over the last few years, growing more than 30% in 2021. However, this year, sentiment appears to have changed, and the share price has fallen dramatically, down 34.2% in 2022.

It’s fair to say that the current dividend isn’t massive, with a yield of 0.9%. However, the fact that it is forecast to grow by 10.5% next year is more exciting. Furthermore, this dividend has been paid consistently for the last 30 years and has grown for 29 years. The underlying fundamentals are also very encouraging, with high profit margins, low levels of debt, and great earning efficiency.

However, it is important to note that the current price-to-earnings (P/E) ratio is very high at almost 32, and this is even after the significant price fall in 2022. Furthermore, cash generation is below the three-year average, so if this downward trend continues, it could cause problems for the already-low dividend yield.

Yet I think Halma is a prime example of an unlikely dividend opportunity. The current yield would not usually lend itself to an income investment. However, the stellar track record of payment and forecast growth rate has me interested. So the stock is on my buy list for the next time I have some spare cash.

The post An unlikely FTSE share I’d buy for dividend income appeared first on The Motley Fool UK.

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Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma. 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