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Finding quality passive income stocks can be difficult. A solid dividend stock that I think investors should consider buying is Diageo (LSE: DGE). This is why.
Health!
Diageo may not be a household name itself, but I’m pretty sure most people will have been familiar with the international spirits maker’s brands. Some of these include Smirnoff, Guinness, Johnnie Walkerand Baileys. With roots dating back to the 18th century, the business has been around for a long time!
As I write, Diageo shares are trading at 3,117 pence. This time last year they were trading at 3,598p, which is a 13% drop over a 12-month period. Market volatility has created many opportunities to buy quality dividend stocks, like Diageo.
A dividend stock with risks to consider
Let’s face it, all actions carry risks. So let’s leave the bearish aspects aside. For starters, Diageo is at the mercy of macroeconomic headwinds, including soaring inflation and rising interest rates. Because of the former, costs are rising for companies, especially when it comes to production and the supply chain. When costs increase, profits suffer and payments could be affected unless the company can pass them on to customers.
Next, Diageo could see demand for its products weaken due to the rising cost of living. Alcohol is not an essential item and people seem to be more focused on being able to pay for their food, energy and mortgages. This is something I will keep an eye on, especially as there appears to be no end in sight to the current macroeconomic woes.
Why Diageo Stock Could Boost Passive Income
Turning then to the bull case, Diageo has some distinguishing characteristics that make me believe it is an excellent dividend stock. I will break them.
First of all, it has magnificent brand power and a gigantic footprint. The power of the brand is key in its respective market. Consumers regularly buy Diageo brands and this helps the business grow, the money flows and, in turn, translates into juicy dividends. In terms of footprint, the company operates virtually all over the world. It would be difficult to travel somewhere and not find a Diageo brand on sale. This is positive as it can also improve performance.
Another aspect for Diageo that may be overlooked is the fact that the business appears to generate high margins. This is great for a company when looking to reward investors as profits increase significantly. This is evident from the years of commercial information available.
Finally, as with any dividend stock, yield matters. Now, a dividend yield of 2.6% may not seem high. However, Diageo has a good track record of consistent payouts and growing dividends. I’m more interested in that compared to high performance that is unsustainable. It’s worth remembering that dividends are never guaranteed.
Overall, Diageo looks like a great passive income stock that I think investors should consider as part of a diversified stock portfolio. There’s a lot to like and the volatility of the market right now means the stock looks even more attractive at current levels.
