I’d put £79 a week into this dividend growth stock for £500 a year in passive income

If successful, dividend growth investing is the sweet spot for investors looking for passive income. This is when I invest in stocks that grow in value over time and simultaneously pay me up in dividends every year.

Although relatively rare, the stock does exist. Here’s one that I think can unlock £500 a year in passive income.

Fantastic company

Games workshop (LSE: GAW) is a creator of fantasy realms, primarily in Warhammer universe This is a futuristic place where armies of humans, elves, orcs, and other hot creatures fight for survival and supremacy.

This fictional universe has a cult-like fan base. And the company has done a good job of monetizing each of these elements. There are statues, novels, comics, video games, subscription TV channels, and more.

It recently signed a multi-year license agreement with the tech juggernaut Amazon to bring its own Warhammer universe to live through movies and series. That bodes well for future growth and shows the appeal of the company’s unique brand.

price power

Earlier this year, the company warned customers that it would increase the prices of thousands of products starting March 6. The average increase for plastic kits is about 6%.

Although this is rarely popular with customers, it shows the company’s pricing power. That is, the ability to raise prices on a semi-regular basis without losing customers. This helps preserve profits. The statue maker’s operating margin today is a very healthy 35%.

It obviously also supports dividend growth. However, this is a delicate balancing act. There is a risk that the company could alienate its fan base with higher prices. That could hurt sales and threaten dividends.

£500 per year in passive income

Before I continue, I should note that I have a profitable broker offering zero commission trading. Unfortunately, not all investment platforms do. So paying a commission per trade will make this strategy more expensive.

The lowest price from Games Workshop in 2019 is 88.50 Euros. The highest value of the 2023 share is 2.68 Euros. That means I would need around 187 shares to generate a passive income of £500 a year. That will cost me around £16,550.

Now, that’s a significant amount of money. I may not be able to handle it all at once. But if I drip-feed £79 a week into the savings, I can gradually work my way to that figure.

Doing this method will take four years to reach your target of £500 in annual passive income.

Of course, stock prices will not remain stable for four years. The share price over the past year has ranged from £56 to £90. But milking your money every week can help you deal with market volatility.

Finally, Games Workshop has a generous policy of paying occasional special dividends. That is, the excess cash they have, is distributed to shareholders in addition to regular dividends.

Obviously this is not guaranteed – no dividends – but it means I will receive five payments per year instead of the normal four that the company pays. Any special dividends will exceed £500 per year in passive income.

If I didn’t already own stocks, I would add them to my diversified income portfolio now.