Although cash returns can never be guaranteed, I consider buying dividend-paying stocks to be one of the least taxing ways of generating passive income. Today, I’m focusing my attention on what I believe to be one of the best shares to buy on the UK market.
FTSE 250 member Hipgnosis Songs Fund (LSE: SONG) invests in music royalty rights. Every time someone streams a track it owns, Hipgnosis receives a cut, albeit a very small one. The £1.2bn-cap already had almost 61,000 songs on its books by January. A little over 3,000 of these have hit the top spot in the charts. Recent catalogue additions includes work by Neil Young and Shakira.
The performance of SONG since it arrived on the market in July 2018 has been solid, although not spectacular. Anyone buying the shares when Hipgnosis listed will have seen their capital grow by around 15%.
As one might expect, it’s not been a straight line up. Like everything else, the shares tumbled in 2020 as the coronavirus took hold. Then again, anyone buying the shares at the bottom of the market crash would have enjoyed an even bigger gain of around 28% by now. Naturally, this is far below the recovery seen in glitzy tech stocks. However, it’s a far better return than that of the FTSE 250 index as a whole over the same period.
Share price performance aside, it’s the dividend stream that interests me the most about Hipgnosis.
Analysts expect the business to return 5p per share to holders in the current financial year. This gives a yield of 4.2%, based on the price of the stock as I type.
Now, 4.2% may not be the biggest cash return I can find in the FTSE 250, but it’s not to be sniffed at. Let’s not ignore the fact that the best Cash ISA currently returns just 0.55% in interest. While keeping some cash in reserve for life’s little emergencies is prudent, holding any more than truly necessary will seriously limit the ability to grow one’s wealth.
Another attraction to SONG’s dividends is that they’re likely to be covered over twice by profits. This means a cut looks unlikely as things stand. What a contrast to many other supposedly-reliable income stocks on the market!
But the dividend stream isn’t the only thing that makes me think Hipgnosis may be one of the best shares to buy today. A price-to-earnings (P/E) ratio of just 10 looks cheap, even if capital gains aren’t a priority.
It’s also worth paying attention to the firm’s PEG (price/earnings to growth) ratio. As a rough rule of thumb, anything below 1.0 suggests investors are getting a lot of bang for their buck. Hipgnosis’ PEG ratio is just 0.4.
Not without risk
Although I consider Hipgnosis to be among the best shares to buy, no investment is without risk. There’s always a chance the company may be overpaying for the rights it’s buying. There’s also no guarantee that listening tastes won’t change and the popularity of formerly-lucrative artists may fall.
On top of the above, you have the 1.35% ongoing charge eating into returns. While nothing in this world comes free, it’s vital to consider the opportunity cost of not buying other income-generating stocks where the only ongoing fee is charged by the broker.
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Paul Summers 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.