Here’s how investors could target £41,282 of annual passive income from £20,000 in this dividend gem

I am always on the lookout for stocks that consistently pay big dividends and deliver strong passive income. This is money made with little effort from me, so I am a big fan. 

As FTSE 100 and 250 valuations have surged over the past year, these have become more difficult to find. This is because a stock’s dividend yield moves in the opposite direction to its price.

Nevertheless, every now and again my personal stock screener flags such a stock. And it did so recently with Energean (LSE: ENOG).

What does it pay?

In 2024, the natural gas exploration and development giant paid a dividend of 120 cents (90p). It gives a dividend yield of 10.1% on the current £8.90 share price. This is not a fluke as it paid the same amount in 2023, and in 2022 it paid 90 cents.

Moreover, analysts forecast that its dividend yield this year will be 10.3%, next year 10.4%, and in 2027 10.5%.

Of course, the key long-term driver for any firm’s future dividends (and its share price) is earnings growth.

A risk to Energean’s is any prolonged period of bearish gas prices. However, analyst consensus is that its earnings will grow by an annual average of a whopping 49% to end-2027.

So what’s the passive income?

Investors considering a £20,000 holding in the firm would make £34,680 in dividends after 10 years. This is based on the current 10.1% dividend yield, and on the use of dividend compounding. After 30 years on the same basis, the dividends would rise to £388,729.

Including the initial £20,000 investment, the total value of the Energean holding would be £408,729. And this would deliver a superb annual passive income from dividends of £41,282!

Potential share price gains too?

As mentioned, earnings growth does not just power rises in dividends but in share prices too.

So where might Energean’s go? The best way I have found to determine this is the discounted cash flow (DCF) valuation model. This shows Energean shares are 49% undervalued at their current £8.90 price. Therefore, their ‘fair value’ is £17.45.

In my experience as a former senior investment bank trader and private investor for over 35 years, asset prices eventually tend to converge to their fair value.

My investment view

I was going to buy Energean very recently but could not decide which of my other energy stocks to sell. Having three – in addition to Shell and BP – would unsettle the risk/reward balance of my overall portfolio.

I was toying with the idea of unloading my Rio Tinto holding, as it is also in the commodities sector. But I am loath to do that as it has also performed well.

One thing I am certain of though, is that Energean’s terrific earnings prospects put it top of my watchlist. If any of these stocks start underperforming, then I will switch.

For those investors without such a conundrum however, I think Energean is seriously worth considering as a key passive income holding.

The post Here’s how investors could target £41,282 of annual passive income from £20,000 in this dividend gem appeared first on The Motley Fool UK.

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Simon Watkins has positions in Bp P.l.c., Rio Tinto Group, and Shell Plc. 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.

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