Investors looking to earn a second income can do a lot worse than checking out the FTSE 100. But it’s not always the most obvious names that make the best investments.
While there’s a lot to like about the likes of Barclays, Shell, and Tesco, I’m looking elsewhere right now. And Games Workshop (LSE:GAW) is in my sights.
Warhammer
The stock is up over 3,000% in the last 10 years, due to the strength of its Warhammer franchise and customer-focused management. And I think there’s even more to come.
Games Workshop has a film in production that’s being made in conjunction with Amazon. That’s still a couple of years away, but it could be a huge boost for the company in two ways.
The most obvious is direct revenues from licensing its intellectual property. While a lot of these will be upfront payments, there’s also scope for long-term royalties that could be highly profitable.
The more subtle benefit, though, is the potential to expand the Warhammer reach. A successful film could have a big effect in bringing people – especially from the US – into its network.
Dividends
I own Games Workshop shares and I’m optimistic about the future for the firm. And the stock also has some very attractive properties for income investors.
The company’s core operations exploit its intangible assets, meaning they don’t need huge cash investments. And that means it can distribute most of its profits to shareholders as dividends.
Over the last 12 months, Games Workshop has distributed £4.85 per share. On that basis, I’ll need 2,425 to get £12,000 a year – or £1,000 a month — in cash distributions.
With the stock at £166.50, that’s an investment of £406,000. I’m not in a position to make that – or anything like it – right now, but I have a plan for building a stake over time.
Growth and reinvestment
By reinvesting the cash I receive, I can grow my Games Workshop investment without using any more of my own capital. And at today’s prices, that’s an extra 3% a year by itself.
That won’t get me to 2,425 shares any time soon, but there is another force going in my direction. Over the last 10 years, the company has increased its dividend per share by 1,200%.
As a result, the number of Games Workshop shares needed to earn £1,000 a month in dividends has fallen by 92%. And while I don’t expect the same growth rate, I do think my target might come down as my stake goes up.
Together, those two things make a powerful force for long-term returns. So I expect to be making much more income from my investment in future, even if I don’t put any more of my cash in.
£1,000 a month?
I don’t know whether I’ll reach £1,000 a month with my Games Workshop investment. Part of that depends on what other opportunities are available.
I also don’t want my entire portfolio invested in one stock – especially one that isn’t diversified and might be vulnerable if consumer spending falls in a recession. And that’s a risk I’m very mindful of.
I do, however, want Games Workshop to be part of my ISA for the long term. And as the dividend yield gets close to 3%, I’m starting to think about buying it again.
