Passive income can be made in a variety of different ways. One of the most popular methods is using dividend stocks. If an investor is shrewd in making good picks, the income potential can be very high. Here’s one company that could provide a generous amount of cash over time from a £2k investment.
A sustainable payer
I’m talking about Foresight Environmental Infrastructure (LSE:FGEN). The stock’s down 3% in the past year but boasts a dividend yield of 11.08%.
The company’s an investment trust that owns a portfolio of real-world assets. This includes things like solar farms, wind projects and waste processing facilities. In terms of generating revenue, these are cash-generating assets tied to long-term contracts and essential services like electricity and resource management.
Importantly, a good chunk of the assets is backed by government contracts. This should provide investors (particularly those looking for reliable income) with some confidence, as it’s unlikely the government will default on any existing deals.
In terms of the outlook, I think the world’s starting to turn back to renewables, given the fragility shown in global markets by the conflict in Iran. I believe a greater focus will be placed on alternative energy sources this year, which should translate into more business opportunities for the trust.
Dividend interest
Let’s move to one of the most attractive elements of the stock, the dividend. It isn’t just paying income, it’s growing it. The trust’s targeting a dividend per share of 7.96p for this year, marking its 11th consecutive annual increase.
Even more importantly, that dividend looks well covered. The company has a dividend cover of 1.1, meaning the trust generates more cash than it pays out. In other words, it isn’t scraping the barrel to fund those payouts, which is another good sign for dividend hunters. The income’s backed by strong operational cash flow, which covered dividends by 1.32x in the latest full year.
If someone invests £2k now, they could expect to receive dividends later this year. Assuming the income was reinvested, it can help to compound the growth of the portfolio. If this were kept up over time, by year 15, it could be generating £1,092 for that year. That assumes no additional money’s invested.
Some might think this is too long to wait. In that case, adding an additional £150 a month helps speed things up. In this case, by year four, the portfolio could pay out £1,361.
Risk and reward
Of course, there are risks involved. Given the likely rise in inflation from the energy price spike, interest rates in the UK could rise later this year. As the business funds a chunk of any new project via debt, higher interest rates will increase costs and could weigh on profits.
Even with this concern, I still think the stock’s worthy of consideration by income investors.
