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I have been looking for stocks to buy that can start my passive income journey. And I have found two UK shares that I fit the bill.
Generating dividend income is like making a snowball. It starts small, but with enough runway, it can get bigger and bigger.
That means I’m looking for two things. The first is a company that pays dividends to its shareholders and the second is a business with a good chance of doing this for some time.
With that in mind, here are the UK stocks to use to start the dividend snowball. Neither has a huge dividend yield right now, but I think both have growth prospects going forward.
InterContinental Hotels
Top of my list InterContinental Hotels Group (LSE:IHG). The stock currently has a dividend yield of around 1.8%, meaning an investment of £1,000 would now yield £18 in dividend income.
Not much, but the company has increased its dividend at a significant rate. In recent years, the share price of IHG Corporation has changed to +6.5% per year.
If the growth rate continues, then an investment of £1,000 today will pay £32 per year after 10 years. And after 30 years, I will have an annual return on my initial investment of over 11%.
The biggest risk here is that the company’s dividend payments are not always consistent. During the pandemic, IHG suspended its dividend.
But since then, the dividend has changed from 90p per share in 2019 to £1.05. And the company’s business model gives me confidence that it can continue to grow in the future.
Operating on a franchise model allows IHG to keep costs low. That means the company can distribute a lot of income to its shareholders.
diploma
I also think that diploma (LSE: DPLM) could be a great stock to start building your dividend snowball with. Like IHG, the dividend yield is just under 2%, but it has achieved impressive growth.
Diploma has increased its dividend at 16% annually for the past five years. At that rate, an investment of £1,000 today would return £35 after five years and an annual return of 19% after 30 years.
The real question – and risk – concerns Diploma’s ability to sustain that level of growth. When 16% growth is demanded, I think the size of the company means that it has a long growth runway ahead.
With a market cap of just under £3.5bn, the company should be able to grow by acquiring other businesses. And our existing subsidiaries are also posting excellent organic growth.
Like IHG, Diploma has a business model that allows it to generate significant returns to investors. About 76% of the company’s operating profit is free cash flow.
Stocks to buy
Both InterContinental Hotels Group and Diploma have business models that allow them to pay significant dividends. And we both have decent prospects for increasing returns over time.
I already have Diploma shares in my portfolio, but I don’t have IHG shares yet. But for now, both are on my list of stocks to buy when I have the money to do so.
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