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Share dividends are the best way I have found to generate passive income — money made with little ongoing effort. Aside from choosing the shares, nothing much else needs to be done apart from periodically checking on their progress.
One stunning prospect has recently emerged, with all three of the key elements I want in such a stock.
So, what is it, what are its three great qualities, and how much passive income could it make?
Three bases are loaded
The stock in question is FTSE natural gas giant Energean (LSE: ENOG). It first came to my attention when its dividend yield broke through the ‘magic’ 10% level. It is called that because over 10 years at the same interest rate, an investor’s funds would double.
This does not even include dividend compounding being used! This involves reinvesting the dividends back into the stock and produces much higher gains than not doing so.
The share has further magic for me because it satisfies the two other key criteria I look for in a standout passive income holding.
The first of these is its exceptional earnings growth potential. This is precisely what powers any firm’s dividends (and share price) higher long term.
A risk to Energean is an enduring period of bearish gas prices. However, consensus analysts’ forecasts are that its earnings will grow 21% a year to end-2027.
The final of the three key qualities is that a stock’s price should look enormously undervalued. A discounted cash flow analysis shows Energean is 59% undervalued at its current £8.85 price. Therefore, its ‘fair value’ is £21.59.
This is important to me, as if I want to sell the stock then I would like to make as big a profit as possible on it. And asset prices tend to converge to their fair value over time.
How much passive income?
I see a standard investment cycle for long-term investors as being 30 years. This roughly equates to starting around 20 and finishing with early retirement at around 50.
So, an investor considering a £20,000 holding in the firm would make £36,331 in dividends after 10 years! This is based on a 10.4% average yield with dividend compounding used.
On the same basis, this would rise to £138,661 after 20 years and to £426,880after 30 years. At that point, including the initial £20,000 stake, the total value of the investment would be £446,880.
And this would pay an annual passive income from dividends of £46,476.
That said, dividend yields change over time. This is because a stock’s price rises and falls and the annual dividend payout may be changed.
However, in the shorter term, analysts forecast that Energean’s dividend yield will increase to 10.8% in 2026, before dropping back to 10.5% in 2027.
My investment view
Unfortunately for me, I already own several stocks in the energy sector. Buying any more would disrupt the overall risk-reward balance of my portfolio.
However, I am seriously considering selling one of these to make way for Energean.
In any event, I think it’s extremely high yield, huge undervaluation, and exceptional earnings growth are well worth the consideration of other investors.
