Here’s how investors can target £23,238 a year in passive income from £10,000 invested in this FTSE energy stock

The best way I have found to generate passive income (money made with minimal effort) is share dividends.

The only real effort is choosing the shares in the first place and periodically monitoring their performance thereafter. That said, I select my passive income stocks very carefully. After all, I want them to generate sufficient income for me to be able to live off them entirely at some point.

There are three key elements I look for in all of them. These include a high dividend yield, undervalued share price, and strong earnings growth prospects. Consequently, FTSE 250 energy firm Energean (LSE: ENOG) has caught my eye recently.

Strong earnings growth

The powerhouse of any company’s share price and dividend is its earnings growth.

Focused on the East Mediterranean oil and gas fields, a risk to Energean is heightened geopolitical tension in the area.

Last month, the Israeli government ordered it to temporarily suspend operations at its Karish offshore gas field. This is around 90 kilometres from Israel, and it was feared it might be subject to attacks by Iran. But the field restarted a few days later and remains in full production.

That said, its 2024 results released on 20 March showed adjusted earnings before interest, taxes, depreciation and amortisation up 25% year on year to $1.162bn (£0.86bn). And cash flow from operating activities — which can be a major growth driver itself — soared 71% to $1.122bn.

As it stands, analysts forecast that Energean’s earnings will increase annually by a very robust 18.8% to end-2027.

Share price undervaluation

A share’s price is whatever the market will pay for it, while its value reflects the fundamental worth of the underlying business.

Being able to identify the difference is the key to big, long-term profits, in my experience. This includes several years as a senior investment bank trader and 35 years as a private investor.

Discounted cash flow analysis pinpoints where any stock price should trade, based on cash flow forecasts for the underlying business.

The DCF for Energean shows its shares are undervalued by 59% at their current price of £9.22.

Therefore, their fair value is technically £22.49.

High dividend yield

In 2024, Energean’s dividend was $1.20, equivalent to 96p. This gives a yield on the current share price of 10.4%.

So, £10,000 invested in the stock at 10.4% will generate £18,166 in dividends after 10 years. This is based on the dividends being reinvested back into the stock – known as ‘dividend compounding’. It is a similar concept to leaving interest to accrue in a regular savings account.

After 30 years on the same basis, the dividends would increase to £213,440!

Adding in the £10,000 stake, the total value of the holding by that time would be £223,440. And that would pay an annual passive dividend income of £23,238 at that point!

Of course, that assumes the dividend yield will stay the same and that the company won’t run into any problems, which isn’t guaranteed.

Will I buy it?

I am very happy with my existing passive income portfolio holdings and will stick with them.

However, for investors looking for such stocks I think Energean is well worth considering.

I believe its strong earnings growth prospects will drive its share price and dividends higher over the long term.

The post Here’s how investors can target £23,238 a year in passive income from £10,000 invested in this FTSE energy stock appeared first on The Motley Fool UK.

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Simon Watkins has no position in any of the shares mentioned. 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.