Owning dividend shares can be extremely satisfying. Without having to do a day’s work, investors can receive a share of the profits generated by some of the best businesses in the world.
Buying the best dividend stocks can result in a lifetime of passive income. And for investors trying to find shares to buy, the FTSE 100 and the FTSE 250 are excellent places to look.
Pest control
I’ve been looking at shares in Rentokil Initial (LSE:RTO) recently. While the dividend yield’s only 2%, I think the stock could be a durable source of passive income for the long term.
Importantly, it doesn’t look as though the business is going to have to worry about demand any time soon. The company stands to benefit from some key trends, including climate change.
Warmer summers and wetter winters tend to create hospitable environments for pests. That means the need for Rentokil’s services is likely to keep increasing over time.
The business is also less cyclical than most. Rats, fleas and other pests are entirely indifferent to the wider economy, meaning the business is largely protected from an economic downturn.
None of these features is particularly positive intrinsically. But in the context of Rentokil, it’s a sign the company’s going to be around for a long time.
A growing dividend
At today’s prices, 2,386 shares in Rentokil would cost me around £10,000. And with a dividend yield just above 2%, I could hope to make £207 in passive income in the next year.
That doesn’t sound like much, but the company’s been growing its dividend at an average of 15% a year since 2014. That includes stopping payments entirely during the pandemic.
I’m not expecting that to continue, but even at 10% a year, 2,386 shares could be returning £536 a year after a decade. And this increases to £1,392 after 20 years and £3,612 after 30.
That would be a very attractive return. But even the most durable business comes with risks.
Risks
Acquisitions are a key part of Rentokil’s growth. There’s a good rationale for this in terms of increasing efficiency by attracting more business in particular areas, but it can be complicated.
Buying other companies brings the risk of overpaying for them. And the possibility that Rentokil might have done this in 2022 is the reason the stock fell sharply in October last year.
The firm acquired Terminix to boost its presence in the US, where about 60% of its revenue comes from. But the early signs are that the company might have paid too much.
That’s a risk investors will have to be aware of. But the potential rewards are great – a dominant position in an industry that’s likely to grow for the foreseeable future is a big prize.
A buying opportunity?
Despite its recent stumble, Rentokil has a good record when it comes to acquisitions. And after the recent decline, its own shares don’t look that expensive.
The current share price implies a price-to-sales (P/S) ratio of below 2 – lower than the levels it reached during the pandemic. If I had £10,000 to invest in dividend shares, I’d buy this one.
The post I’d buy 2,386 shares of this FTSE 100 dividend growth stock to aim for £3,612 a year in passive income appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
