This UK dividend aristocrat looks like a passive income machine

After a 14% fall in the company’s share price, Spectris is a stock that should be on the radar of investors looking for passive income.

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Shares in Spectris (LSE:SXS) have fallen 14% since the start of the year. That should put it on the radar of investors looking to generate passive income.

With 34 years of consecutive dividend increases, the firm has proven its ability to keep growing its shareholder returns through difficult conditions. And this seems likely to continue.

What is Spectris?

Spectris manufactures precision measurement tools. Its products do things like measure the size of particles, test contamination, and analyse the properties of materials.

With technical products, competition is often limited, meaning customers have a limited ability to change to other suppliers. This gives companies like Spectris strong pricing power.

The business sells into various settings including semiconductor manufacturing, aerospace, and pharmaceutical research. These are cyclical and demand can fluctuate at different times.

This is reflected in the 8% like-for-like sales decline Spectris reported in its most recent update. But over the long term, I’d expect the healthcare, semiconductors, and aerospace to grow.

Growth

Investors shouldn’t ignore the risk of a prolonged downturn, especially with a stock trading at a price-to-earnings (P/E) ratio of 23. But it’s easy to see where long-term growth might come from.

The most important is organic growth. While like-for-like sales were lower than the previous year, the company’s order book grew by 3% during the first three months of 2024.

There’s also the opportunity to grow through acquisitions. In addition to a strong balance sheet, the sale of one of its subsidiaries has given Spectris cash that can be used to buy other businesses.

Lastly, the company is in the middle of a share repurchase programme. It spent £50bn on buybacks between January and March and there’s another £100m available to bring the share count down further.

Dividends

All of this makes Spectris look like a reliable source of income. The company has grown its dividend per share by an average of 5.5% per year over the last decade and this looks set to continue.

The downside for investors is that buying the stock today involves starting from a low base. Even after a 14% fall in the share price, the dividend yield is still only 2.24%.

If Spectris increases its dividend at 5.5% per year for the next decade, investing £10,000 today could generate £362 in annual income. This grows to £619 after 20 years and £1,058 after 30.

That might not sound like much, but it amonuts to an average annual return of 5.5% per year. And that’s higher than the 4.76% yield on offer from government bonds at the moment.

A stock to consider buying

Spectris shares look risky in the short term given the volatile nature of the company’s earnings and the cyclical end markets it sells into. But I expect the business and the stock to do well over time.

If the company can keep growing over time, it should perform better than a 30-year bond. So I think investors with a long-term view on passive income should consider buying the stock.

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.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Spectris Plc. 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.

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