Earning passive income can be a great way to generate wealth over time. Money coming in while you spend time in your career can be an energizing boost to your portfolio.
Investors looking to boost their passive income can supercharge that task with Domino's Pizza (DPZ -1.76%) stock. The company pays a healthy dividend that has multiplied over the years.
The dividend has been growing at a healthy rate
Indeed, Domino's Pizza has increased its dividend payment from $0.80 in 2013 to $3.76 in 2021. That means investors who bought Domino's stock in 2013 are getting nearly five times the dividend payments they received when they first purchased the stock. But can today's investors expect similar success?
To answer that question, consider that Domino's earnings per share have increased by a compound annual rate of 23% in the last decade. That is critical because dividends are paid out of profits. Theoretically, a company cannot sustain a dividend per share above its earnings per share in the long run. This is similar to how a household cannot support spending levels above income.
If you keep spending above your income, eventually you will exhaust your savings and max out your credit cards, at which point you will be forced to cut down on spending. For that reason, the robust earnings growth that Domino's provides can comfort passive income investors and fuel dividend growth into the future.
What's more, Domino's is nowhere near exhausting its dividend payment capability even at its current profit levels. The dividend payout ratio, which measures the percentage of profits a company pays in dividends, has held consistently below 30% for Domino's in the last three years. That means the company can sustainably increase its dividends even if earnings per share do not rise.
The strong potential for Domino's to continue growing its dividend is the primary reason investors need not be concerned about the modest 1.1% dividend yield they would initially receive.
Domino's Pizza stock is not expensive
Fortunately for passive income investors looking to add Domino's to their portfolios, the stock is not expensive. Trading at a price-to-earnings of 30 and a price-to-free cash flow of 30, Domino's is selling at right about its average valuation of the previous three years.
Today's passive income investors can buy a company that has increased its dividend nearly fivefold and expanded earnings per share by more than 20% in the last decade at a fair price. Of course, no investment is without risk. Domino's profits are pressured by inflation in the near term.
The company will report earnings on July 21. Investors should look to those results to determine if Domino's is grappling effectively with rising costs.