If successful, dividend growth investing is the sweet spot for investors seeking passive income. This is when I invest in a stock that grows in value over time and simultaneously pays me a rising dividend each year.
Though relatively rare, such stocks do exist. Here’s one I think could unlock £500 a year in passive income.
Fantastical company
Games Workshop (LSE: GAW) is the creator of fantasy realms, most notably the Warhammer universe. This is a future setting where armies of humans, elves, orcs, and other warmongering creatures fight for survival and supremacy.
This fictional universe has an extremely loyal fan base. And the company has done a fantastic job of monetising every element of it. There are figurines, novels, comics, video games, a subscription TV channel, and more.
Recently the firm signed a multi-year licencing deal with tech juggernaut Amazon to bring its Warhammer universe to life through movies and a series. That bodes well for future growth and demonstrates the company’s unique brand appeal.
Pricing power
Earlier this year, the company gave its customers the heads-up that it would be increasing prices on thousands of products from 6 March. The average rise for plastic kits amounted to about 6%.
While this is rarely popular with customers, it does demonstrate the company’s pricing power. That is to say, its ability to semi-regularly raise prices without losing customers. This helps preserve profits. The figurine maker’s operating margin today is a very healthy 35%.
It obviously supports dividend growth too. However, this is a delicate balancing act. There’s a risk that the company could alienate its fan base with more prices rises. That could harm sales and threaten the dividend.
£500 a year in passive income
Before going further, I should note that I’m fortunate my broker offers zero-commission trading. Unfortunately, not all investment platforms do. So paying a commission per trade would make this strategy far more costly.
The Games Workshop share price today is £88.50. The forecast dividend for fiscal 2023 is £2.68 per share. That means I’d need approximately 187 shares to generate £500 a year in passive income. Those would cost me around £16,550.
Now, that’s a significant amount of money. I may not be able to afford all that in one go. But if I instead drip-fed £79 a week into the stock, I could gradually work my way towards that figure.
Doing it this way would take four years to reach my target of £500 in annual passive income.
Of course, the share price won’t stay stable for four years. The stock’s price range over the last year is between £56 and £90. But drip-feeding my money in every week could help smooth out the natural volatility of the market.
Finally, Games Workshop has a generous policy of paying the occasional special dividend. That means any surplus cash it has, it distributes to shareholders in addition to the ordinary dividend.
Obviously this isn’t guaranteed — no dividend ever is — but it would mean I’d receive five payments per year rather than the normal four the firm pays. Any special dividends would be on top of my £500 a year in passive income.
If I didn’t already own the stock, I’d add it to a well-diversified income portfolio today.
