A core part of my passive investment strategy is to have annual reviews of my portfolio. I like to decide what holdings to include for the next year based on performance over the previous year. In addition, I also like to find exciting new opportunities that may help me achieve my goals in 2023.
It is no secret that I am very interested in income-generating shares. These give me the best chance of generating a consistent monthly return on my investment while being reasonably passive to manage. I like to make these selections at the end of the year so that they can be left alone to compound throughout the new year. This allocation also acts as a good form of diversification from my growth and value-focused investments.
My investment approach
Finding the right income-generating share is sometimes quite tricky, and finding a balance of returns and fundamentals can take a while. I also want a reasonably priced share so that I don’t get caught in a growth-style investment by accident.
I’m not looking for companies that offer the highest dividend. Instead, I am happy to pick a stock with a lower yield if it has a high level of forecast dividend growth. This is especially important when making long-term investment decisions, as it will help to boost the compounding effect of these dividends.
For this reason, I have looked at many new companies that have paid and grown their dividends for years. Although I am not after a large yield, I expect a reasonable dividend in the region of 3%-3.5%. I am also after solid fundamentals, with good cash flow and positive forecast performance.
My 2023 opportunity
To build this 2023 portfolio, I have been looking at CRH (LSE: CRH), a global manufacturer of building products. The company has performed well over the last few years, increasing by 27.5% in 2021. However, this has reversed slightly. It is now down almost 14% this year and has a price-to-earnings ratio of under 12.
Of course, the dividend is a primary focus for me when looking at this stock, and the yield of 3.1% is in line with my expectations. Furthermore, this dividend has been paid consistently for the last 29 years and has grown for the previous six. Also, it is forecast to grow by 13.9% next year, which is an important consideration when finding an income investment.
The underlying fundamentals are also strong, with reasonable profit margins, strong return on capital employed (ROCE), and high free cash conversion. Turnover and profit are expected to grow above the company’s three-year average, which is encouraging. It is expected to increase by nearly 13% in 2023, and profit is forecast to grow by 18.4%. This is an important characteristic, as the forecast dividend needs to be accompanied by increasing earnings to ensure it can continue to be paid comfortably.
However, debt levels are higher than I would like, at over 42% of market capitalisation. Also, the sudden stock price decline this year could indicate that momentum is fading. If this continues, it could start to erode any future income generated by the share.
Nonetheless, CRH presents a great income opportunity for my 2023 portfolio. Therefore I intend to buy the share at the beginning of the new year once I get the necessary cash.