When getting into the world of investing, different people will have different goals and objectives. However, one of the most common is a desire to achieve consistent passive income. This is my main objective in building a portfolio. I want to find companies that can provide stable dividends year after year, and grow their yields over time. Yet despite how simple this approach may seem, finding the right stocks that can combine quality fundamentals and a reasonable yield is essential.
My new approach
When looking for shares to generate passive monthly income, I’ve aimed to look at many factors, not just yield. My primary focus is on finding simple yet high-quality companies. I often think of a high-quality business as one with solid earnings growth. It will also generate free cash flow, and have low debt levels. It may not be the most active investment and is unlikely to generate huge share price gains. But this approach is often one of the best ways to generate consistent income.
Another consideration is that the dividend has been paid and grown consistently for many years. This metric will often be more important to me than the current yield. I’m more than happy to invest in a stock with a lower dividend if I can see that it has been paid every year and will steadily increase to a more significant level over time.
A prime example of what I’m looking for is Cranswick (LSE: CWK), a UK-based supplier of fresh pork and other meat products. The stock has had a tough year, falling almost 20% in 2022, despite solid performance over the previous years. It is also down nearly 30% from its peak in 2021. As a result, the price-to-earnings (P/E) ratio is 14.5 and is forecast to be just 14 next year, considerably below the company’s three-year average.
An unlikely opportunity
This company could be seen as an unlikely opportunity, due to the current dividend yield of 2.5%. This would not be considered a prime passive income generator for many investors, as this yield is not particularly remarkable. However, I am drawn to the fact that this dividend has been paid consistently for the last 30 years and has grown for the previous 19. Furthermore, it is forecast to grow by almost 5% in 2023, reaching a yield of 2.7%. It also has dividend cover of 2.7 times, indicating that earnings per share (EPS) can comfortably cover the current yield.
However, it is important to note that shares rarely fall in value for no reason. Due to the consumer-focused nature of the food production sector, the company is exposed to several headwinds. The current inflationary environment and cost-of-living crisis are likely to pressure the business. Especially due to the low-profit margins currently achieved by Cranswick.
Nevertheless, it presents me with a unique opportunity to access a very consistent dividend yield in a company with strong underlying fundamentals. For this reason, I am tempted to add it to the income section of my portfolio when I make my annual share purchases.
