Home Stock Market A FTSE 100 stock I’d buy for passive income today – The Motley Fool UK

A FTSE 100 stock I’d buy for passive income today – The Motley Fool UK

by callingemout
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The current geopolitical situation is truly dreadful at a human level. For investors, it illustrates how difficult it is to look for income stocks in the FTSE 100. Many companies, which look attractive from an income perspective initially, are not great passive income investments.

Corporations that appear to offer higher dividend yields than the rest of the market might come with more risk than their lower-yielding peers.

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As such, when I am looking for passive income stocks to add to my portfolio, I search across the whole market. I do not exclude companies just because they do not offer market-beating dividend yields. 

And there is one company I am more interested in than any other blue-chip stock as a passive income investment today. 

FTSE 100 income stock

Severn Trent (LSE: SVT) is one of the UK’s largest and last remaining publicly-traded water providers

The provision of water and wastewater services is one of the most defensive markets around. Humans will always need to consume water, and cities will always need wastewater services. This essentially gives these businesses a captive market. 

The market is also highly regulated. This has benefits and drawbacks. On the one hand, regulators tightly control how much profit these water companies are allowed to make from consumers. That means they cannot just hike prices if they want to make more money.

On the other hand, the controlled nature of the market means new entrants cannot just start up overnight. A lot of capital and investment is required in order to take a new position in the market.

Even then there are no guarantees regulators will approve a new company’s pricing position. 

Passive income investment 

These are the reasons why I think this FTSE 100 firm is an excellent passive income investment today. Even though the stock only supports a dividend yield of 3.6% at the time of writing, this dividend payout is protected by the company’s competitive position in the market and its defensive nature.

The regulated nature of the market means the corporation can project its cash flows out over the next five to 10 years with a high level of certainty. This means management can try and set the dividend at a sustainable level without having to worry about future dividend cuts. 

That is not to say the dividend is 100% secure. There are always going to be risks the company will have to deal with. For example, rising interest rates could increase the cost of its debt, which could force management to reduce the payout and free up more cash to pay to creditors. 

Despite this, I would acquire Severn Trent for my portfolio, considering its income credentials. As a passive income investment, I think the group has some of the best qualities in the FTSE 100. I think it is highly likely the company will still be paying a dividend to investors 10 years from now. 

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Rupert Hargreaves 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.

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