This FTSE 100 insurer’s 6.8% dividend yield is forecast to keep rising. Is it time to add it to my passive income portfolio?
I own several shares specifically to generate a very high passive income. This is money made with minimal effort on my part, aside from choosing the stocks and monitoring their progress periodically.
These stocks have already enabled me to live a much better life than I would have done otherwise. And they should also allow me to enjoy an extremely comfortable retirement when I decide the time is right.
My core passive income portfolio consists of M&G (current dividend yield 10.2%), Phoenix Group Holdings (9.5%), aberdeen (9.4%), Legal & General (8.8%), and British American Tobacco (7.4%).
There are other stocks I bought because I expect their dividend yield to soon rise above the 7%+ I require. Why this figure? Because I can get 4.8% from the risk-free rate (the 10-year UK government bond yield) and shares are not risk-free.
That said, my attention has been drawn to a new potential candidate for inclusion in this key portfolio for me.
What’s the new prospect?
FTSE 100 insurer Admiral (LSE: ADM) almost ticks my minimum dividend yield requirement box already. It paid a 192p dividend in 2024, which yields 6.8% on the current £28.41 share price.
Crucially though, analysts forecast this payout will rise to 206p in 2025, 209p in 2026 and 221p in 2027.
These would generate respective dividend yields of 7.3%, 7.4% and 7.8% — all well above my 7%+ floor.
Undervalued share price?
It also ticks my second criterion for inclusion in my passive income portfolio, which is an undervalued share price. This decreases the likelihood of my losing money on the share price if I ever sell it. Conversely, it increases the chance of my making a profit in that event.
A discounted cash flow analysis using other analysts’ figures and my own shows the stock is 49% undervalued right now.
That means the fair value for the shares is £55.71, although prices can (and do) go down as well as up.
Strong core business?
Admiral also ticks the third and final requirement box for me, which is a strong core business. It is earnings growth that ultimately powers a stock’s price and dividend higher over time.
And in this insurer’s case, analysts forecast its earnings will rise 6.7% a year to the end of 2027.
This looks a conservative figure to me, given its excellent 2024 results. However, a risk to its earnings does remain the cut-throat competition in the insurance sector.
That said, its 2024 pre-tax profit of £839.2m was nearly double 2023’s £442.8m. As a result, earnings per share soared 95% to 216.6p and the dividend was increased 86% to its current 192p level.
How much passive income can be made?
Investors considering a £10,000 stake in Admiral would make £9,701 in dividends after 10 years on the average 6.8% yield. This would rise after 30 years to £66,465 on the same average yield. These numbers also factor in ‘dividend compounding’ being used to turbocharge these dividend returns.
Adding in the £10,000 initial stake and the Admiral holding would be worth £76,465 by then. On the same 6.8% yield, this would pay £5,200 a year in passive income by that point.
Consequently, I have seen enough to say that I will buy the shares very soon indeed.
The post This FTSE 100 insurer’s 6.8% dividend yield is forecast to keep rising. Is it time to add it to my passive income portfolio? appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
More reading
- Here’s how someone could invest £20k in an ISA to target £1,300 of passive income per year
- Here’s how £350 a month could put a stock market beginner on the road to wealth!
- How much would a 45-year-old need to invest in an ISA to earn a £1k monthly passive income at 65?
- As the Admiral share price jumps after profit nearly doubles, should I buy?
Simon Watkins has positions in British American Tobacco P.l.c., Legal & General Group Plc, M&g Plc, Phoenix Group Plc, and aberdeen group. The Motley Fool UK has recommended Admiral Group Plc, British American Tobacco P.l.c., and M&g Plc. 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.
