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While I still have 20 to 30 years until retirement, today I’m looking to buy stocks that will provide me with a second income when the time comes. And there are two that are on my radar right now.
Neither of them have a particularly impressive dividend yield right now, but both have been growing impressively. That’s why I believe there are opportunities today to buy stocks that will be worth much more in the future.
Diploma
The first thing on my list is Diploma (LSE:DPLM), which has become a member of the FTSE 100 following a 15% rise in the company’s share price over the past 12 months. And I hope more come.
The stock currently trades at a price-to-earnings (P/E) ratio of approximately 31 and has a dividend yield of 1.85%. It’s not particularly high, but what catches my attention is not where the stock is now, but where it’s headed.
Over the last decade, Diploma has increased its dividend by an average of just under 12% annually. Even if that figure falls to 9% in the future, the company could be paying £5.97 in dividends per share (a 20% yield at current prices) 30 years from now.
Of course, there’s a chance the company won’t grow at this rate for the next three decades. Much of Diploma’s growth comes from acquisitions and this comes with risks of overpaying for companies or failing to find suitable targets.
However, the company has an impressive track record of growing earnings per share, and 9% annual growth implies a slower future rate than it had achieved before. So I think this is a very realistic possibility.
Bunzl
Bunzl (LSE:BNZL) The shares have largely traded sideways over the last 12 months. The stock is currently trading at a P/E ratio of 20 and has a dividend yield of 2.17%.
With UK interest rates above 5%, this is not particularly striking. But I think buying shares today could be rewarding over time.
The company’s 7% annual dividend growth is supported by 8% earnings growth. If this continues, then a £1,000 investment in Bunzl shares today could generate £150 a year in passive income when I retire.
Bunzl’s operating income is approximately five times that of Diploma. That means the company has to do more to maintain a high growth rate, which increases the risk that it won’t be able to do so in the long term.
However, if this becomes an issue, I think the company can increase its earnings per share by using its cash for buybacks. So I’m not worried about the growth rate slowing down yet.
Long-term investment
When it comes to investing for my retirement, I have a big advantage. Being able to look 20 to 30 years into the future means I have time on my side and the opportunity to be patient.
Neither Diploma nor Bunzl look like great passive income stocks today, so an investor with a short-term focus should look elsewhere. But as a long-term dumb (capital M!) investor, I think both will be worth much more in the future as their earnings and dividends grow.
