The FTSE 100 is home to some terrific dividend-paying enterprises. And, collectively, these payouts have pushed the average index yield to around 4% – higher than most indices worldwide. Therefore, when looking for new passive income opportunities, I find the UK’s flagship index to be one of the best starting places.
It might be tempting to focus on those with the highest yields. However, in my experience, this can lead to some lacklustre returns. Chunky payouts can be difficult to sustain, let alone grow. Therefore, the smarter decision may be to invest in a modest-yielding stock that has the potential to offer significantly more in the future. And one firm already in my portfolio that seems to fit that bill is Howden Joinery (LSE:HWDN).
The Footsie’s latest addition
Howden has long been a member of the FTSE 250. But its steady stream of successes over the last decade has enabled the firm to grow considerably. So much so that in September, it made its debut in the FTSE 100.
As a quick reminder, the company is a vertically integrated supplier of construction materials with a speciality in fitted kitchens. Families looking to renovate their homes can select from a wide range of designs from Howden’s catalogue. A contractor can then be brought in to work directly with Howden, who provides all the necessary materials and assembly instructions.
As income stocks go, Howden’s 3.2% yield isn’t the most exciting. However, what makes it an interesting opportunity, in my eyes, is the firm’s knack for hiking shareholder payouts each year. Excluding the 2020 dividend cut caused by Covid-19, the firm has increased payouts every year since 2011. And investors who held on throughout this time have seen their passive income increase 40 times over!
Turning £70 into £1,000
Putting aside £70 a week, or £10 a day, can quickly add up. And in the space of a month, a nice lump sum of £280 can be accumulated (plus any extra from earning interest in a savings account). Drip feeding this money into Howden shares could build a sizable position over time.
But at a 3.2% yield, an investor would need to allocate around £31,250 to generate just £1,000 a year. Needless to say, that’s not exactly pocket change. And it could take up to eight and a half years to reach this threshold with just £70 a month.
However, as previously mentioned, Howden has a knack for raising payouts. And with it, the average yield of an investor’s trade will start to climb. While I’m sceptical that another 40x increase in shareholder dividends is likely to occur over the next decade, even a simple 2x could double today’s yield and drastically reduce the amount of capital investment required.
The bottom line
Nothing is ever guaranteed in the world of investing. Just because Howden has achieved success in the past doesn’t mean it will continue to do so. The company faces plenty of competition from cheaper alternatives in the home renovation industry. And with the current state of the macroeconomic climate, customers may consider the firm’s rivals in the interest of saving money.
Despite these risks, I remain cautiously optimistic. After all, demand for home renovation isn’t likely to disappear anytime soon, and the business has a history of successfully navigating choppy waters.