Generating passive income from a portfolio of shares is a long-term game, but this year’s troubles have presented investors with an exciting short-term opportunity.
The FTSE 100 is packed full of top stocks offering supersized yields while trading at low valuations. I’ve highlighted a number of my favourites but here’s one I haven’t looked at in years. Private equity firm Intermediate Capital Group (LSE: ICP).
Passive income and growth
The global alternative asset manager supplies capital to growing businesses and now manages $71.3bn of assets across 15 countries. This is the type of company that does well when the economy is booming, but can struggle when times are tough, as it is now.
Its stock is down 47% over the last year, and it trades just 12% higher than five years ago. That’s bad news for existing investors but does offer an opportunity for people like me looking to build long-term passive income at a discounted price.
Intermediate Capital Group would currently give me dividend income of 6.5% a year. That yield looks secure too, covered 2.4 times by earnings. Yet buying today is not without its risks.
First-half group profit crashed from £264.7m to just £35.6m, with earnings per share plunging from 83.9p to 13.5p. This was largely down to an investment company loss of £108.1m.
Private equity profits and losses tend to be lumpy though, and other news was much more positive. “Robust” fundraising hit $6bn in six months, while third-party fee income was £265.3m, up 33% on last year.
The balance sheet is “strong” with liquidity of £1.3bn, while happily for shareholders, the interim dividend was hiked from 18.7p to 25.3p.
The company has a solid track record of increasing dividends. Full-year shareholder payouts totalled 30p in 2018, then climbed steadily to 45p in 2019, 50.80p in 2020 (when many FTSE 100 companies scrapped theirs in the pandemic), 56p in 2021 and 76p last year. Revenues, pre-tax profits and earnings per share all rose strongly over the same period.
As the world stumbles into recession, the going will get harder. Yet, as with many shares on the FTSE 100, I feel that today’s troubles are an opportunity for investors like me who take a long-term view.
Intermediate Capital Group is now trading at just 6.4 times earnings. In March, it was notably pricier at 11.3 times. The yield then was just 2.6%. It’s a lot more generous today.
This makes now a really attractive entry point, especially for far-sighted investors. I would only buy a stock like this for a minimum 10-15 years, and ideally longer. Today, I would reinvest my dividends, and start drawing them as passive income after I retire.
Intermediate Capital Group invests in the businesses of the future. The FTSE 100 offers plenty of passive income opportunities, but this appears to offer strong share price growth prospects as well. It has just shot straight to the top of my 2023 watchlist. When I have some cash to spare after Christmas, I will buy it.
