Is there a better way to target passive income than by buying dividend-paying shares? For me the answer’s an emphatic ‘no.’ Once I’ve selected which income stocks to buy, the idea is I can sit back and watch the dividends flow in.
Sudden shocks can slash the dividends paid by individual stocks. Yet with a diversified mix of income shares, investors can still enjoy a strong income even when one or two holdings fall short.
Here’s one top dividend share I think demands further research in February. Read on to see what makes could make it worth serious consideration for a passive income portfolio.
Dividend growth
Dividends are surging at Pan African Resources (LSE:PAF) as gold prices take off. This week it announced an interim dividend of 0.54745p per share, driven by a resurgent metal price and a sharp production increase (up 51% in the six months to December).
For the full financial year to June, the gold stock’s tipped by analysts to pay a 3.2p per share total reward. As a consequence, its forward dividend yield is 2.3%.
So what’s so exciting about that, you ask? It isn’t, to put it simply. That yield’s even below the FTSE 250 index’s broader average of 3.2%.
But what really excites me is the possibility of rapidly growing dividends. To give a taste, Pan African’s expected to hike the full-year dividend to 4.73p per share in the next fiscal year, driving the yield to 3.3%.
Gold rush
There are several reasons I’m confident dividends can keep storming higher. Gold prices continue to boom, hitting fresh records around $5,600 an ounce in recent days. Analysts are increasingly confident they can keep storming higher — the boffins at Wisdomtree have said bullion could reach $5,995 by Q4, if the Federal Reserve aggressively cuts interest rates and the US dollar sinks.
Secondly, Pan African’s production is soaring. It’s on course for 275,0000 to 292,000 gold ounces this financial year, up from 197,000 last time out. Further out, group output could surge as its Mogale Tailings Retreatment (MTR) and Tennant Mines projects ramp up to full capacity.
Finally, the gold producer is financially robust and in great shape to supercharge dividends. Net debt dropped 65% to $49.9m as of December, and the miner’s expecting to be debt free next month.
What could go wrong?
As I said at the top, there’s no such thing as a guaranteed dividend. With Pan African Resources, shareholder payouts could miss analyst targets if gold prices head lower instead. They could also disappoint if the miner’s asset expansion plans hit trouble.
Yet on balance, I’m confident the gold stock can hit current dividend forecasts. It’s also worth mentioning predicted payouts are covered between 4.5 times and six times by expected earnings through the next two years. This provides added protection in case earnings are blown off course.
I think Pan African’s deserves serious attention as a passive income stock, and especially at current prices. Its price-to-earnings (P/E) ratio is a rock-bottom 9.9 times.
