My passive income portfolio is comprised of FTSE stocks that share three key qualities.
First, they all generated a dividend yield of at least 7% when I bought them. This is more than 2% above the current ‘risk-free rate’ (the 10-year UK government bond yield).
I see this as compensation for taking on the additional risk of investing in shares.
Second, they were all at least 30% underpriced to their ‘fair value’ at the time of purchase. To clarify: price is whatever the market will pay for a stock, while value reflects underlying business fundamentals.
Exploiting the price-to-valuation gap is the key to making big long-term profits, in my experience.
And third, they all had strong earnings growth prospects when purchased.
This is important because it is growth here that ultimately powers any firm’s stock price and dividends higher over time.
I am a big fan of passive income, as it is money made with minimal effort. And aged over 50 now, I want to use it to allow me to keep reducing my working commitments.
Harbour Energy (LSE: HBR) was recently flagged by my personal stock screener as a possible candidate.
On the first point, it more than meets my 7%+ dividend yield requirement, with a stunning 10.1% payout. By contrast, the present average FTSE 100 yield is 3.3% and the FTSE 250’s is 3.5%. The risk-free rate is also well behind at 4.7%.
Harbour Energy’s 2024 yield was based on the 26-cent total dividend, fixed at a sterling equivalent of 20.2p.
Analysts’ forecasts are that the dividend yield will increase to 10.4% next year and remain there in 2027.
On the second criterion, Harbour Energy is 69% undervalued, according to the discounted cash flow model. This is the best way I have found of determining the fair value of any stock.
It clearly identifies the price at which any share should trade, based on cash flow forecasts for the underlying business.
Therefore, at a current price of £2, its fair value is £6.45.
And finally, its earnings growth is forecast by analysts to be a stunning 31.4% a year to end-2027. A risk here is a long bearish trend in oil and gas prices.
However, in its H1 2025 results, its revenue soared 179% to $5.3bn, and its free cash flow rocketed from $0.38bn to $1.36bn.
Meanwhile, adjusted profit after tax jumped 300% to $0.4bn. This followed the successful integration of leading European independent oil and gas company Wintershall Dea’s portfolio over H1.
Investors considering a holding of £20,000 would make £34,680 in dividends after 10 years. This would rise to £388,729 after 30 years (assuming no adverse effects on the dividend, which is not guaranteed).