Seeking passive income from shareholder dividends is a well-trodden path. However, it may not be a good idea to bung all our spare capital into just one stock.
If the underlying business hits bumps or setbacks (not uncommon), the share price and the dividend stream can plummet together.
In the real world, it’s best to diversify across several stocks. At least one catastrophic company-specific event can’t then wipe out the entire portfolio.
However, pretending to choose just one can focus the mind. What company would give the confidence of a decent multi-year return while allowing sound sleep in the meantime?
Strong brands
I’d look for a stable, well-established, and larger business. So, for me, that means searching in the FTSE 100 and FTSE 250 indexes.
I prefer to target companies operating in defensive sectors, such as utilities, consumer staples, healthcare, tech, IT, and others. Such businesses offer products and services that are often needed through all phases of the economic and business cycles. As such, they tend to enjoy stable revenues, earnings, and cash flows whatever the general economic weather.
For example, I’m keen on companies in the fast-moving consumer goods space such as Diageo and Unilever. Both firms have a long record of stable cash flows and have demonstrated resilience in the past because of their strong and popular brands.
That said, wobbles in earnings and stock prices for both outfits over the past couple of years suggest their brands may not be as defensive as I once thought. The past three years or so have been challenging for most businesses, and the cost-of-living pressures have caused some customers to switch to cheaper alternative products – perhaps permanently.
On a positive note, both enterprises have a cheaper valuation now than for years after recent share price weakness.
Here’s my top pick
However, the Coca-Cola brand looks as strong as ever. So I’d aim to participate in its success story by focusing on the shares of Switzerland-based bottler Coca-Cola HBC (LSE: CCH).
The Footsie company enjoys exclusive rights to manufacture and sell Coca-Cola products across a territory that includes 30 countries in Asia, Europe, and Africa. However, The Coca-Cola Company owns the brand and is responsible for marketing initiatives.
The setup works by Coca-Cola HBC buying concentrates, bases, and syrups from Coca-Cola to use for producing beverages for sale and distribution. On top of that, the firm sells other sparkling drinks.
Trading has been strong for years. Revenue, earnings, and cash flow have grown and the dividend record is impressive, with a compound annual growth rate (CAGR) running just above 10%.
Perhaps one of the biggest risks is the company may one day lose its rights to sell Coca-Cola. Anything is possible with shares and businesses.
However, if I really did have to put 100% of my spare cash in just one stock, I’d embrace the risks and focus on this one.
