Dividend stocks are an excellent option if you're looking to build a recurring income stream. Because mostly profitable businesses pay dividends, it makes this an ideal source of passive income in the long term.
More specifically, investors looking to generate $5,000 per year in passive income can do so by purchasing 6,944 shares of eBay (EBAY 1.32%) stock. At a price per share of $47 as of this writing, the purchase will set you back roughly $326,400. The e-commerce retailer has grown earnings robustly over the previous decade, demonstrating the potential to boost dividends over the long run.
EBAY EPS Diluted (TTM) data by YCharts
eBay's asset-light business model can work in passive income investors' favor
Indeed, eBay has increased earnings per share at a compound annual rate of 23.6% in the last decade. The company runs on an asset-light business model that keeps expenses low. Unlike rival Amazon, eBay does not own or operate any fulfillment centers, leaving shipping arrangements to sellers. Instead, it is content with taking a percentage commission for each transaction on its platform. It works in passive income investors' favor because when eBay generates profits, it does not need to use the cash to maintain or build new fulfillment centers, which leaves money to pay dividends.
eBay's robust earnings growth allowed it to start paying a dividend in 2019 of $0.56 per share. It has already boosted its dividend twice, to $0.64 in 2020 and $0.72 in 2021. Since dividends are paid out of earnings, passive income investors can reasonably expect eBay to continue increasing its dividend over the next several years. That's especially true if you consider its dividend payout ratio. The metric divides the dividend payment by profits and indicates room for expansion.
EBAY Payout Ratio data by YCharts
eBay only paid 4% of its earnings as dividends, opting to reinvest the rest of the funds in the business. Furthermore, since eBay only initiated a dividend in 2019, it could be that management is taking a conservative approach to the payment total. That's because investors typically punish a company severely (by selling its stock) if it is ever to cut or pause a dividend. Therefore, management prefers to pay a dividend they feel confident they can sustain and increase over time.
Indeed, online sales as a percentage of overall sales totaled just 14% in the U.S. in 2020. The figure is estimated to grow to 22% by 2025 as buying online offers several conveniences to consumers, including being open 24/7 and shipping to your doorstep. eBay benefits from the trend as one of the two most visited e-commerce sites in North America in 2021.
Passive income investors are getting a fair price for eBay stock
EBAY Price to Free Cash Flow data by YCharts
eBay is trading at a price to free cash flow of 16.8, a little above the average price it has sold for in the last five years, save for the brief collapse at the pandemic's onset. That means investors are getting a fair price to build a stream of $5,000 per year in passive income -- a stream that is likely to grow more prominent over the years.
