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.
Dividend potential
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.
