Buying shares in businesses that pay dividends to investors can be a great way of earning extra income without having to work. And the FTSE 100 has some great stocks to buy.
Investing in the stock market is always a risky business. But for investors who are willing to take a long-term approach, I think there are some nice opportunities at the moment.
InterContinental Hotels
Top of my list is InterContinental Hotels Group (LSE:IHG). The company allows hotels to use its branding and network in exchange for a fee plus a percentage of revenues.
I think IHG is an example of what billionaire investor Warren Buffett would call a wonderful business. With running and maintenance costs left to individual owners, its costs are very low.
This allows management to use the cash the business generates to repurchase stock. Over the last decade, the outstanding share count has fallen by around 10%.
The biggest risk with the stock at the moment is that it isn’t cheap. At a price-to-earnings (P/E) ratio of 31, the share price might be vulnerable if interest rates keep rising.
From a passive income perspective though, I take the view that investors should focus on the company’s earnings. Ultimately, this is what sustains the dividend.
To me, the underlying business looks like it’s in good shape. It has a strong collection of brands and the number of rooms within its franchise is growing.
The dividend yield is currently around 2%, which isn’t particularly eye-cathcing. But I think the company’s asset-light business model gives this potential to go much higher over time.
Bunzl
I also think Bunzl (LSE:BNZL) shares could be a great source of passive income. The company is a collection of smaller distribution businesses. Its products include (among other things) packaging, hygiene products, and personal protective equipment. In a fragmented industry, the business stands out to me.
The company’s big advantage over its competitors is its scale. This allows it to provide a more reliable, comprehensive and efficient service than its rivals.
It also balances this with the attention-to-detail of a smaller operator though. Bunzl’s decentralised model allows for specialist knowledge and close customer relationships.
As a conglomerate, there’s always a risk when it comes to acquiring new businesses. But the company’s management has shown time and again that it can do this in a disciplined way.
Like IHG, the stock has a dividend yield of 2%. The company’s strong record of growing its earnings gives me reason to think this can be significantly higher in future.
Long-term investing
One of the most important things when it comes to investing is patience. The big returns for investors don’t come in a week, a month, or even a year – they can take decades to transpire.
With that in mind, I don’t think investors like me should be looking for huge increases to our income in the short term. The best thing to do is to start small and build up.
I like both InterContinental Hotels Group and Bunzl as stocks to buy for passive income. If I had cash available to invest, I’d look to buy them now and hold them long into the future.
This post was originally published on Motley Fool
