Investing in the stock market can be a great way of earning passive income. And whether it’s with a lump sum or regular investing, the returns can be spectacular.
Dividends are never guaranteed and even the best investors need some good fortune every now and again. But I’m a firm believer that shares in great companies are the best source of extra income.
Warren Buffett
Here’s an example of this in action. In 1994, Berkshire Hathaway CEO Warren Buffett invested $1.3bn in American Express shares.
At the time, the stock had a dividend yield of just over 3%. That doesn’t particularly jump out as a passive income opportunity, but the story since then has been one of steady growth.
Since 1994, American Express has grown its dividend by an average of 7% per year. That’s hardly explosive, but over 31 years, it’s enough to turn a 3% return into a 27% return.
Three things have been key to the success of Buffett’s investment. The first was finding a company with a strong competitive position that would allow it to keep growing for 30 years.
The second was buying it at a reasonable valuation. The Berkshire Hathaway CEO took advantage of a controversy with American Express to buy shares when the price was low.
The third was holding on – the stock has climbed significantly since 1994, but Buffett has resisted the temptation to sell. The result is a huge passive income stream that keeps growing.
Finding stocks to buy
FTSE 100 chemicals company Croda International (LSE:CRDA) has a strong competitive position, a history of dividend increases, and is trading at an unusually low price.
The firm’s Q3 results indicate that the business is starting to recover from a prolonged downturn following the Covid-19 pandemic. Overall revenues were 5% higher than 2023.
Croda’s consumer care business, which accounts for 56% of total sales, reported stabilising demand and solid 5% growth. But there were stronger performances from elsewhere.
Revenues from the Industrial Specialties division increased 14%, mostly driven by higher volumes. While this is a small part of the overall business, the result is highly encouraging.
The appointment of Robert Kennedy Jr. as US Health Secretary is probably bad news for Croda’s lipids business. This provides chemicals for vaccine manufacturers.
Despite this, I expect the firm to continue its strong record of dividend increases. These have averaged 4.5% per year and the current yield is above 3%.
A buying opportunity?
Unsurprisingly, Croda’s stock has fallen a long way since the end of the pandemic. As it continues to fall, I’m keeping a close eye on it.
The combination of strong competitive position, cheap valuation, and long-term outlook is what I use to aim for long-term passive income. And Croda is getting close to my target price.
