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I am always on the lookout for stocks that consistently pay big dividends and deliver strong passive income. This is money made with little effort from me, so I am a big fan.
As FTSE 100 and 250 valuations have surged over the past year, these have become more difficult to find. This is because a stock’s dividend yield moves in the opposite direction to its price.
Nevertheless, every now and again my personal stock screener flags such a stock. And it did so recently with Energean (LSE: ENOG).
What does it pay?
In 2024, the natural gas exploration and development giant paid a dividend of 120 cents (90p). It gives a dividend yield of 10.1% on the current £8.90 share price. This is not a fluke as it paid the same amount in 2023, and in 2022 it paid 90 cents.
Moreover, analysts forecast that its dividend yield this year will be 10.3%, next year 10.4%, and in 2027 10.5%.
Of course, the key long-term driver for any firm’s future dividends (and its share price) is earnings growth.
A risk to Energean’s is any prolonged period of bearish gas prices. However, analyst consensus is that its earnings will grow by an annual average of a whopping 49% to end-2027.
So what’s the passive income?
Investors considering a £20,000 holding in the firm would make £34,680 in dividends after 10 years. This is based on the current 10.1% dividend yield, and on the use of dividend compounding. After 30 years on the same basis, the dividends would rise to £388,729.
Including the initial £20,000 investment, the total value of the Energean holding would be £408,729. And this would deliver a superb annual passive income from dividends of £41,282!
Potential share price gains too?
As mentioned, earnings growth does not just power rises in dividends but in share prices too.
So where might Energean’s go? The best way I have found to determine this is the discounted cash flow (DCF) valuation model. This shows Energean shares are 49% undervalued at their current £8.90 price. Therefore, their ‘fair value’ is £17.45.
In my experience as a former senior investment bank trader and private investor for over 35 years, asset prices eventually tend to converge to their fair value.
My investment view
I was going to buy Energean very recently but could not decide which of my other energy stocks to sell. Having three – in addition to Shell and BP – would unsettle the risk/reward balance of my overall portfolio.
I was toying with the idea of unloading my Rio Tinto holding, as it is also in the commodities sector. But I am loath to do that as it has also performed well.
One thing I am certain of though, is that Energean’s terrific earnings prospects put it top of my watchlist. If any of these stocks start underperforming, then I will switch.
For those investors without such a conundrum however, I think Energean is seriously worth considering as a key passive income holding.
