Why the Diageo share price is still my top passive income opportunity

Great passive income stocks don’t often trade at bargain prices. But when they do, Stephen Wright thinks it’s important to take advantage.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Despite showing signs of life recently, Diageo‘s (LSE:DGE) price is down 35% from its 2022 highs. And I continue to think this is a passive income opportunity I’m not willing to miss.

Created with Highcharts 11.4.3Diageo Plc PriceZoom1M3M6MYTD1Y5Y10YALL23 Oct 201923 Oct 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

Historically, opportunities to buy Diageo shares at attractive prices haven’t come around all that often. So rather than wondering when the stock’s going to recover, I’m looking to buy it.

Valuation

Diageo shares currently trade at a price-to-earnings (P/E) ratio of just under 19 and have a dividend yield of 3.2%. Both of these represent unusually good value. 

Diageo P/E ratio & dividend yield 2014-24


Created at TradingView

Over the last decade, the chance to buy the stock and get a dividend yield hasn’t come around often. In general, investors have had to settle for something between 2% and 3%.

Diageo shares traded at some unusual P/E multiples during the Covid-19 pandemic. But even in more usual times, investors have generally had to pay above 20 times earnings for the stock.

I don’t think anything significant has changed with the underlying business though. So while I wouldn’t have bought the stock at its highs, it’s a different story now.

Macroeconomic challenges

Diageo’s been battling through a difficult macroeconomic environment, which is why the stock’s been falling. Furthermore, there’s reason to think this might continue.

LVMH recently reported earnings for the third quarter of 2024. And the results were disappointing, with revenues down 3% compared to the previous year.

That has investors wary of a luxury goods recession, but the biggest decline came in its Wines & Spirits division, where sales fell 7%. This is something Diageo shareholders should take note of.

There’s not much the company can do about the macroeconomic environment. But the risk of consumer discretionary spending remaining weak is a genuine one for the FTSE 100 firm.

A durable business

Despite this, I’m still looking to load up on Diageo shares. I’ve been buying the stock for around a year or so and I think it could be a great source of long-term passive income.

The company has category-leading products in a number of categories, including scotch, gin, and vodka. And this isn’t a coincidence.

Diageo’s size means it’s able to spend heavily on marketing to keep its brands relevant to consumers. This makes it difficult for rivals to displace its competitive position.

The company’s scale also gives it a big advantage. It allows the firm to acquire smaller competitors in a way that adds value to them before they become significant challenges.

Why I’m still buying

Finding an under-the-radar bargain in the stock market can be an incredibly rewarding feeling. But sometimes the best opportunities are in plain sight. 

Diageo shares have been cheap for a while, but I still think they’re unusually good value. With the company’s key assets still intact, I’m continuing to build my investment.

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 positions in Diageo Plc. The Motley Fool UK has recommended Diageo 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.

More on Investing Articles

Investing Articles

£20K invested in Tesla stock last April is now worth…

Despite all the bad headlines lately, Tesla stock has put in a storming performance over a 12-month timeframe. Is this…

Read more »

Investing Articles

If a 40 year old invests £600 a month in a SIPP, here’s what they could have by retirement

With no retirement savings at 40, an investor could put £600 a month into a SIPP and grow its value…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Why hasn’t its 9.9% yield boosted the Phoenix share price?

Phoenix Group has a dividend close to double digits, but saw a weak share price performance in recent years. Christopher…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

With average 10% yields, these mid-cap FTSE shares could supercharge a passive income portfolio

Some of the best passive income gems can be found on the UK's smaller indexes like the FTSE 250 and…

Read more »

A coin being dropped into a piggy bank
Investing Articles

As the Barclays share price tanks 19% in 2 days, is this a great buying opportunity?

As a trade war sends the Barclays share price into a tailspin, Andrew Mackie steps back to look at the…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Is Fundsmith Equity still a good choice for a Stocks and Shares ISA in 2025?

Many Britons hold the Fundsmith Equity fund in their Stocks and Shares ISAs. Is this still a good move? Edward…

Read more »

Investing Articles

Nvidia stock is down 24% this year. Time to buy the dip?

Christopher Ruane has been eyeing Nvidia stock as a potential addition to his portfolio for a while. Is a recent…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Down 25% since January, this resilient dividend stock’s catching my eye

Maintaining the UK’s rail, water, and energy infrastructure isn’t the most exciting business. But it has made this a solid…

Read more »