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Earning a second income from investments can be a great feeling. And even for someone starting from scratch, the stock market can be a great place to look for opportunities.
When it comes to passive income, an obvious thing to pay attention to is the dividend yield a stock comes with. But that’s not the only thing investors should be considering.
Long-term growth
Consumables distribution firm Bunzl‘s (LSE:BNZL) a good example. The stock currently comes with a 2% dividend yield, which is below inflation and below the Bank of England’s base rate.
This however, misses an important point. The firm has increased its dividend per share for over 30 consecutive years – and since 2015, it has grown at an average of almost 8% a year.
If this continues, a £10,000 investment today could be returning £432 a year after 10 years, £932 after 20 years, and £2,013 a year after 30 years. I think that’s a significant return.
Of course, that depends on Bunzl being able to keep growing over the next three decades. And it’s worth noting the company’s strategy of expanding through acquisitions is a risky one.
Even the best investors make mistakes and opportunities might be hard to find in future. But the FTSE 100 company does have a defence mechanism to try and limit this risk.
If Bunzl’s management feels the right acquisitions aren’t available it can use the cash the firm generates for share buybacks. And that could well keep the dividend growing for the long term.
Alternatives
I think Bunzl’s well worth a look for investors prepared to build a passive income stream over time. But for those looking for more immediate cash, there are some other worthy alternatives.
BP and Shell are interesting candidates. Both stocks come with dividend yields above 4% and have – in my view – a promising strategy of focusing on hydrocarbons instead of renewables.
That creates a risk of prices falling, especially if OPEC production picks up. But I think sticking to what they excel in is the right strategy for the FTSE 100 oil majors.
Elsewhere, the likes of Tesco and Sainsbury’s benefit from much more stable supply and demand dynamics. And both come with attractive dividend yields.
Discount retailers provide a threat in an industry where customers are mostly motivated by price. But scale provides an important advantage and the largest supermarkets have this.
I think BP, Shell, Tesco, and Sainsbury’s are all worth considering for investors looking for a second income. They don’t have Bunzl’s growth prospects, but they offer higher starting yields.
Investing for income
The important thing with investing is to think about the long term. This is true whether investors are looking for extra income this year or 30 years from now.
A high starting yield can be attractive. But investors need to be confident there’s a decent chance of this proving sustainable over time for the stock to be worth considering.
