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If you intend to build a secure and profitable income stream, it is best practice to diversify among many different stocks. However, examining the potential returns from each stock can give you a better idea of how much to allocate to each.
That’s why I find out how much this stock can bring if I buy 5,000 shares. Doing this exercise with each stock in my portfolio gives me more insight into their relative value. Equally, it is important to evaluate the risk that each stock presents.
Managing money wisely
The MONY team‘s (LSE: MONY) the FTSE 250 parent company to online budgeting and personal finance sites MoneySuperMarket and MoneySavingExpert. The sites offer price comparison tools and various tips and tricks to help consumers save money. A perfect stock option if you are considering a way to earn extra money!
I remember when MoneySavingExpert launched in 2003. I was a big fan from the early days, long before I learned about the benefits of leveraged investing. Now I invest in the very company that taught me the importance of managing money wisely.
Budget forecast
MONY’s has been paying steady dividends since 2007, increasing its annual payout by 8.68% annually. It has grown from 1.6p per share to 13p today and is expected to reach 14p next year.
The yield is expected to rise by more than 7% by 2026, more than double the FTSE 250 average. Earnings per share (EPS) are currently 14p and are forecast to rise faster than dividends, reaching 17p in 2026.
Measurements and risks
Recently, the stock price has been falling, down 43% in five years. I’ll admit, that’s not very encouraging.
However, the low price right now looks like a good value to me. Also, a stronger economy could help it grow from here, as it did in 2014 and again in 2022.
Now at the end of what looks like a ten-year price cycle, it may be preparing to make a recovery. The price-to-earnings (P/E) ratio of 13.8 is expected to decline as earnings improve.
However, there are factors that can stop growth. The UK price comparison market is very crowded. MONY is a major player in this sector but still faces stiff competition from CompareTheMarket and PriceRunner.
There is always the risk that the big service providers choose to work exclusively with other comparison sites. Since this relationship is an important source of income for the business, losing it could jeopardize its profitability.
Estimating returns
Over the past 16 years, the price has grown at a record annual rate of 11.7% per year. Now at around £2 a share, a £10,000 investment would get me 5,000 shares.
Given the above averages, that investment could grow to £274,360 over 20 years (with the profits reinvested). During that time, it will pay annual dividends worth £20,378 a year – around £1,700 a month.
The example above shows the power of compounding returns by reinvesting dividends. However, investing in a single stock is risky. I bought some shares of MONY as part of a larger income portfolio that includes a mix of value, growth and defensive stocks.
I don’t plan to buy more now, but for investors putting together a new portfolio, I think it’s a stock worth considering.
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