My regular morning coffee costs me £4.30 at the shop. Granted, this is a London price, but with prices seemingly always going up, I can’t be alone in thinking there’s a better use for this money. One potential angle could be to save this amount and invest it in the stock market each month to try to generate passive income.
Adding everything together
Assuming a 30-day month, cutting out one coffee a day could save an investor £129. The average dividend yield of the FTSE 100 is 3.1%. On the face of it, making £4 a year from this doesn’t seem too attractive. Yet this ignores the power of regular investing and the impact of compounding over time.
For example, let’s say the investor puts away £129 each month. When a dividend is received, the money is used to buy more dividend stocks. Instead of simply buying an index tracker that pays out the income, an active approach is used. Given the range of yields on offer in the stock market, it’s plausible to have an average yield of around 7% without taking on a crazy amount of risk.
Let’s say this strategy was kept up for a decade. In theory, the pot could be worth £22,587 at the end of this period. In the following year, it could generate £1,683 from dividends alone. This would equate to £140.25 a month. Ironically, this could mean the investor could get a coffee each day, paid for solely by the income!
A stock with a bright outlook
One stock that could be considered for this portfolio is ZIGUP (LSE:ZIG). The share price is down 3% over the past year, with a current dividend yield of 7.61%.
The business positions itself as an integrated mobility solutions provider. In plain English this means it’s involved in the rental and leasing of light commercial vehicles, along with fleet management and maintenance. In terms of scale, it has over 130,000 vehicles owned or leased, with over a million managed vehicles across the UK, Ireland and Spain.
Back in July when the board announced another dividend, the cover ratio was 2.2x. This means the latest earnings per share cover the dividend by more than twice. This is an excellent sign to me that the dividend is sustainable going forward.
Further, the company is benefitting from key shifts in the market, including increased demand for fleet rentals, a continued transition to electric vehicles, and greater outsourcing of management. All of this should help to keep revenue boosted over the coming years, aiding the dividend.
One risk is that the business is exposed to declines in used-vehicle prices and general vehicle ageing. Earnings may suffer if it has to buffer for added depreciation. Just like any stock that pays a dividend, investors need to remember that such payouts aren’t guaranteed. Therefore, forecasts of future income need to be treated with care.
On balance, I think it’s a company investors can consider as part of the broader plan to try and grow a passive income portfolio.
