When entering the world of investing, many dream of achieving passive income from their portfolio, although it is often easier said than done.
Just picking shares with a high dividend yield, and then holding indefinitely, is not always a winning strategy. There are times when a company may begin to suffer in the market, meaning that all passive income is offset by capital losses on the investment.
For that reason, when looking for a dividend share to generate income, I like to focus on simple yet high-quality companies. I often think of a good company as one that generates plenty of free cash flow, has low debt, and has steady earnings growth. These may not be the most exciting investments and are unlikely to generate huge returns, although are often the perfect way to access a reliable dividend.
I have found that Ibstock (LSE: IBST) is probably a prime example of a simple company, with the right fundamentals and, importantly, a high dividend yield of 4.1%.
I think it’s fair to say that the company fulfils the non-exciting criteria, being a manufacturer of clay and concrete products, such as bricks, roof tiles, and fencing. That being said, a straightforward business like this is exactly where I would look to find a great dividend earner, and I think that may well be the case with Ibstock.
The company has strong underlying fundamentals, with consistent earnings, a sensible profit margin, relatively low levels of borrowing, and plenty of positive cash flow. Furthermore, Ibstock has a dividend cover of 1.8, indicating that it can afford to pay its dividend almost twice, with current earnings. This is a good sign, as I would look for companies that can comfortably afford to pay its dividend, as this reduces the risk of it cutting the dividend in the future.
Despite these positive aspects of the company, Ibstock’s share price has not performed particularly well over the last two years. It’s down 9.8% in 2022, and just over 40% from pre-pandemic levels. The company outlined in its latest interim results that industry-wide inflation, and supply chain issues, have impacted profit and cash generation. This would go some way to explaining the recent underperformance, although I am encouraged by management’s comments that Ibstock is making good progress towards its performance targets and focusing on costs.
For reasons discussed previously, it’s important to assess whether any high-dividend company has the underlying performance to generate consistent income. In my opinion, Ibstock’s fundamentals are strong and are likely to allow consistent dividend payments going forward. Furthermore, the current yield of 4.1% is appealing as an income generator, especially given the forecast of this increasing to 4.8% in the following year. I would therefore consider adding this simple yet high-quality company to my portfolio, for future passive income.