I’d buy £10,000 of this overlooked stock for £1,206 passive income

This stock offers one of the most attractive passive income investment opportunities. Dr James Fox explains why he’s backed this tanker company.

| More on:
Passive income text with pin graph chart on business table

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Millions of us invest for passive income, but I’d imagine most of us haven’t come across this stock. It’s not small, but US-listed tanker stock, Nordic American Tankers (NYSE:NAT) probably isn’t the first company we think of for dividends. So, here’s why I’ve bought Nordic American Tanker shares.

Huge dividends

Nordic American Tankers has one of the strongest dividend yields I’ve come across. The current $0.48 annual dividend payment per share equates to a dividend yield of 12.06%. That’s really huge.

From a passive income perspective, investors may be interested to know that it pays its dividends quarterly — more regularly than most companies. If I had £10,000 in the stock, that’d be around £300 every quarter.

Moving forward, analysts expect the dividend yield to hit $0.50 in 2025. This would be covered by $0.63 of earnings. So, the dividend coverage ratio isn’t the strongest, but clearly the company is confident it can cover it.

The dividend coverage ratio is perhaps the weakest part of the investment thesis. Normally, the benchmark for a healthy dividend coverage ratio is around two times. That means that the stated dividend could be covered two times by net earnings.

Booming industry

Thankfully, however, the tanker sector is booming, and it could well be at the start of a super-cycle that will keep pushing revenue and earnings higher. This makes me confident that the dividend remains fundable throughout the medium term.

The tanker industry is currently facing significant shortages and the global fleet is older than it’s been in living memory. As with many things, the reason is the pandemic. During the pandemic, tanker companies were hesitant to put in new orders as business lagged.

Fast-forward to today, the global economy is bubbling away, demand for hydrocarbon products has recovered, and there just aren’t enough tankers.

What makes this shortage worse is that it can take up to five years for a tanker to be delivered from the moment of ordering. Moreover, there are fewer than half the number of shipyards today as there were back in 2007 (700 vs 300).

Additional factors

Long-term supply and demand dynamics are the main reasons pushing leasing prices up — leasing costs are the prices of renting Nordic American’s services. However, there are other factors exacerbating shortages in the industry.

Chief among these are Houthi attacks on vessels transiting the Bab el-Mandeb Strait, and a drought in Panama.

So, why are these important? Well, many vessels that would have been transiting through the Red Sea are now rerouting around the Cape of Good Hope — southern Africa. It’s a huge addition to the length of their journeys and means fewer vessels are available.

Likewise, vessels wanting to transit between the Atlantic and the Pacific are either sitting in queues near Panama or finding alternative routes. The number of ships transiting the canal has reportedly risen to 27, from 18 in January. But this is still down on normal numbers, and queues, as we can see below, are building up.

Source: vesselfinder.com

The bottom line

The dividend coverage ratio could be stronger, but given the positive factors at work in the sector, I’m confident that Nordic American’s dividend payment remains safe. If I could increase my holding to £10,000, I would. I think it’s an excellent passive income opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Nordic American Tankers Limited. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

This dividend stock could pop next week!

This dividend stock happens to have one of the biggest dividend yields I've come across -- 10.7% -- but I'm…

Read more »

Investing Articles

Up 81%, can this FTSE 100 turnaround share keep surging?

This recovering retailer has been one of the FTSE's greatest performers over the past year. Royston Wild considers whether it…

Read more »

Happy couple showing relief at news
Investing Articles

£10,000 in savings? I’d buy 4 passive income shares to target a £100 per week second income!

By buying passive income shares today, I have a great chance to eventually make life-changing wealth. Here's how I'd invest…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

I think this may be an unmissable chance to buy an oversold UK share before it rallies hard

Harvey Jones piled into this beaten down UK share because it looks cheap and offers a sky-high yield. Now he's…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’d invest £500 a month in shares to target a £29,000 second income

Investing in shares is a tried-and-tested way to build a second income. Our writer explains how he’d do it, starting…

Read more »

Investing Articles

Marks and Spencer’s share price rises almost 10% on results day – should I buy?

Adjusted earnings up 45% -- no wonder the Marks and Spencer share price is flying. But there may be much…

Read more »

The words "what's your plan for retirement" written on chalkboard on pavement somewhere in London
Investing Articles

2 UK shares I’d buy and hold in a Stocks and Shares ISA for the long term

Harvey Jones is keen to start using this year's Stocks and Shares ISA allowance. These two FTSE 100 companies are…

Read more »

Investing Articles

If I’d invested £10,000 in BT shares 5 years ago, here’s how much passive income I’d have now!

Dividend investing can be a game changer for passive income, but how would an investment in BT have performed over…

Read more »