This company might just level up my passive income

Ah, the sweet sound of dividends hitting an account. It’s music to any Foolish investor’s ears, isn’t it? Well, fellow dividend hunters, I’ve stumbled upon a company with a dividend yield I like the look of, and fundamentals to keep the value investor in me happy too. Enter DCC (LSE:DCC), a sales, marketing, and distribution giant in the carbon energy solutions world. 

Diverse income

Now, I know what some are thinking. Another boring distributor? Maybe not. The company is like a Swiss Army knife of the business world. From DCC Energy keeping the lights on and the wheels turning, to DCC Healthcare, and DCC Technology with its gadgets and gizmos aplenty. This diversification its secret sauce, helping it weather plenty of economic storms and challenges since its founding in 1976.

Let’s cut to the chase – we’re here for the dividends, right? The shares currently yield a solid 3.67%. And management has been growing this yield pretty steadily since 2015. With a payout ratio of 60%, I believe there’s still plenty of room for further increases, as forecast into 2027 and beyond.

The valuation

It’s regarding valuation where I get really interested. Plenty of great companies have high dividends, but not always the solid balance sheet or growth prospects to make them feel sustainable. A discounted cash flow (DCF) analysis, which uses cash flows to estimate the fair value of a company, suggests it may be undervalued by as much as 48% Obviously, it’s not a guarantee, but it says to me that there’s still plenty of potential, even after a 24% price rise in the last year alone.

Analysts seem optimistic too, with an average price target that’s 33.2% higher than the current share price. Looking ahead, the company’s expected to grow earnings at 9.7% annually. Although this isn’t huge, I like the sound of steady and sustainable growth.

As I noted, a tasty dividend is no good if the company can’t keep paying it. Thankfully, the firm’s finances look sturdier than a castle. Debts of £2bn are well under control, and the debt-to-equity ratio has fallen from 73% to 63% over the last five years. The company has a very healthy £1.1bn in cash ready for a rainy day too.

Risks

Now, I wouldn’t be a proper Fool if I didn’t mention the risks. DCC’s energy division is facing more changes than a chameleon in a bag of Skittles. Such a complex operation can lead to bumps in the road as bigger players get involved, and seek to pick up market share aggressively. And as a global player, the business is much more exposed to currency swings than many others that are focusing on a single region or market. Management is very experienced, but the energy sector is currently seeing a lot of change, so nothing is guaranteed.

Ticks the boxes

So, I think DCC could well be the dividend darling that takes my passive income from a trickle to a torrent over time. It’s got the yield, the growth potential, and perhaps a bargain price tag to boot. Although the sector has plenty of risks, I think this one has the solid fundamentals, and the track record to find success over the long-term. I’ll be buying at the next opportunity.

This post was originally published on Motley Fool