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If successful, dividend growth investing is the sweet spot for investors looking for passive income. This is when I invest in a stock that grows in value over time and simultaneously pays me an increasing dividend each year.
Although relatively rare, such actions do exist. Here’s one that I think could unlock £500 a year in passive income.
fantastic company
games workshop (LSE: GAW) is the creator of fantasy realms, most notably the war hammer universe. This is a future scenario where armies of humans, elves, orcs and other warmongering creatures fight for survival and supremacy.
This fictional universe has a cult fan base. And the company has done a fantastic job of monetizing each item. There are figurines, novels, comics, video games, a subscription television channel and more.
The company recently signed a multi-year license agreement with the tech giant Amazon bring your war hammer universe to life through movies and a series. That bodes well for future growth and demonstrates the company’s unique brand appeal.
Pricing Power
Earlier this year, the company notified its customers that it would increase prices on thousands of products starting March 6. The average increase for plastic kits amounted to around 6%.
While this is rarely popular with customers, it demonstrates the company’s pricing power. That is, its ability to raise prices semi-regularly without losing customers. This helps preserve profits. The figurine maker’s operating margin today is a very healthy 35%.
Obviously, it also supports dividend growth. However, this is a delicate balancing act. There is a risk that the company will alienate its fan base with further price increases. That could hurt sales and threaten the dividend.
£500 a year in passive income
Before I go any further, I should point out that I am lucky that my broker offers commission-free trading. Unfortunately, not all investment platforms do this. Therefore, paying a commission per trade would make this strategy much more expensive.
Games Workshop share price today is £88.50. The expected dividend for fiscal 2023 is £2.68 per share. That means you would need roughly 187 shares to generate £500 a year in passive income. Those would set me back around £16,550.
Now, that’s a significant amount of money. You may not be able to pay all of that at one time. But if you were to put £79 a week into the stock instead, you could gradually work your way up to that number.
Doing it this way would take me four years to reach my goal of £500 in annual passive income.
Of course, the stock price will not remain stable for four years. The share price range over the last year is between £56 and £90. But drip-feeding my money each week could help smooth out the natural volatility of the market.
Finally, Games Workshop has a generous policy of paying occasional special dividends. That means any surplus cash you have, you distribute to shareholders in addition to the regular dividend.
Obviously, this is not guaranteed (no dividend is), but it would mean that you would receive five payments per year instead of the normal four payments the company pays. Any special dividends would be on top of my £500 a year in passive income.
If I didn’t own the stock, I would add it to a well-diversified income portfolio today.
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