While I still have 20-30 years until retirement, I’m looking to buy stocks today that will provide me with a second income when the time comes. And there are two that are on my radar right now.
Neither has a particularly impressive dividend yield at the moment, but both have been growing impressively. So I think there are opportunities to buy shares today that will be worth a lot more in the future.
Top of my list is Diploma (LSE:DPLM), which has become a member of the FTSE 100 after a 15% increase in the company’s share price over the last 12 months. And I’m anticipating more to come.
Right now, the stock trades at a price-to-earnings (P/E) ratio of about 31 and has a dividend yield of 1.85%. That’s not particularly high, but it’s not where the stock is now that’s catching my attention – it’s where it’s going.
Over the last decade, Diploma has increased its dividend by an average of just under 12% per year. Even if that falls to 9% going forward, the company could be paying £5.97 in dividends per share (a 20% yield at today’s prices) 30 years from now.
Of course, there’s a possibility the company won’t grow at this rate for the next three decades. A lot of Diploma’s growth comes from acquisitions and this brings in risks of overpaying for businesses or being unable to find suitable targets.
Nonetheless, the firm has an impressive record of increasing earnings per share and 9% annual growth implies a slower rate going forward than it has been achieving before. So I think this is a very realistic possibility.
Bunzl (LSE:BNZL) shares have largely traded sideways over the last 12 months. Right now, the stock trades at a P/E ratio of 20 and has a dividend yield of 2.17%.
With interest rates in the UK above 5%, that isn’t particularly eye-catching. But I take the view that buying shares today could prove rewarding over time.
The company’s 7% annual dividend growth is backed by earnings growth of 8%. If that continues, then a £1,000 investment in Bunzl shares today could be returning £150 per year in passive income by the time I retire.
Bunzl’s operating income is about five times higher than Diploma’s. That means the company has to do more to maintain a high growth rate, which increases the risk that it won’t be able to over the long term.
If this becomes an issue, though, I think the company can boost its earnings per share by using its cash for buybacks. So I’m not worried about the growth rate slowing down just yet.
When it comes to investing for my retirement, I have one big advantage. Being able to look 20-30 years into the future means that I have time on my side and the opportunity to be patient.
Neither Diploma nor Bunzl looks like a great passive income stock today, so an investor with a short-term focus should look elsewhere. But as a Foolish (capital F!), long-term investor, I think both are going to be worth much more in the future as their earnings and dividends grow.