The gold price has had a strong year so far – completely the opposite to the UK stock market. But it’s the latter that I think offers the best opportunities to create a passive income. This is because after the stock market crash, even around six months later, many shares are still cheaper than they were. They also have dividend growth potential that I believe is vital to creating a passive income from shares.
Where I’d look for dividend growth shares
With an eye on the future and trying to avoid value traps, I’d be tempted to take a long-term view on tech. Especially in light of the recent sell-off, especially in the US. It’s a tricky market to find value in, even here in the UK, but I do think more mature and profitable tech stocks, which are paying dividends, could be profitable investments.
Fundamentally, tech shares are often very scalable and have low fixed costs. This means they’re able to pay dividends as the companies move from an all out push for growth towards increasing their dividend payout. Another benefit I think is that over time many tech shares will grow their share prices as well. Investor demand for companies that combine income and growth potential won’t go away.
The trick I think is to find companies that are established, without paying too much for them. There’s little doubt that has become more difficult as tech share prices have risen.
Some examples of these types of shares
One example of a dividend growth share from the tech market would be Emis. It’s a major IT software supplier to the NHS and other healthcare bodies. In the first half of 2020, operating profits increased 38%, it produced loads of cash, and the interim dividend increased 3%.
Between 2015 and 2019, the dividend has gone from 21.2p to 31.2p. This slow and steady growth makes it ideal for creating a passive income. I expect that as it keeps growing, it will be able to keep increasing the dividend. Given the quality of the business, I don’t think the shares are expensive with a trailing price-to-earnings multiple of 20.
Another example of a share that might fit the criteria is Sanne Group, which also released positive interim results recently. The FTSE 250 financial company has lifted its interim dividend by 2.1%. This follows on from steady increases that saw the dividend more than double from 7p in 2015 to 14.10p in 2019.
I think the future looks bright for the company, with a positive outlook and the possibility to grow organically and via acquisition. I expect the share price, along with the dividend, should rise.
There are many examples of dividend growth shares from across the FTSE 350 and also on AIM. I think selecting ones with future potential is a great way to create a passive income, especially now many shares are cheaper following this year’s stock market crash.
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Andy Ross owns no share mentioned. The Motley Fool UK has recommended Emis Group. 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.