I’d put £79 a week into this dividend growth stock for £500 a year in passive income

If successful, dividend growth investing is the sweet spot for investors seeking passive income. This is when I invest in a stock that grows in value over time and simultaneously pays me a rising dividend each year.

Though relatively rare, such stocks do exist. Here’s one I think could unlock £500 a year in passive income.

Fantastical company

Games Workshop (LSE: GAW) is the creator of fantasy realms, most notably the Warhammer universe. This is a future setting where armies of humans, elves, orcs, and other warmongering creatures fight for survival and supremacy.

This fictional universe has a cult-like fan base. And the company has done a fantastic job of monetising every element of it. There are figurines, novels, comics, video games, a subscription TV channel, and more.

Recently the firm signed a multi-year licencing deal with tech juggernaut Amazon to bring its Warhammer universe to life through movies and a series. That bodes well for future growth and demonstrates the company’s unique brand appeal.

Pricing power

Earlier this year, the company gave its customers the heads-up that it would be increasing prices on thousands of products from 6 March. The average rise for plastic kits amounted to about 6%.

While this is rarely popular with customers, it does demonstrate the company’s pricing power. That is to say, its ability to semi-regularly raise prices without losing customers. This helps preserve profits. The figurine maker’s operating margin today is a very healthy 35%.

It obviously supports dividend growth too. However, this is a delicate balancing act. There’s a risk that the company could alienate its fan base with more prices rises. That could harm sales and threaten the dividend.

£500 a year in passive income

Before going further, I should note that I’m fortunate my broker offers zero-commission trading. Unfortunately, not all investment platforms do. So paying a commission per trade would make this strategy far more costly.

The Games Workshop share price today is £88.50. The forecast dividend for fiscal 2023 is £2.68 per share. That means I’d need approximately 187 shares to generate £500 a year in passive income. Those would cost me around £16,550.

Now, that’s a significant amount of money. I may not be able to afford all that in one go. But if I instead drip-fed £79 a week into the stock, I could gradually work my way towards that figure.

Doing it this way would take four years to reach my target of £500 in annual passive income.

Of course, the share price won’t stay stable for four years. The stock’s price range over the last year is between £56 and £90. But drip-feeding my money in every week could help smooth out the natural volatility of the market.

Finally, Games Workshop has a generous policy of paying the occasional special dividend. That means any surplus cash it has, it distributes to shareholders in addition to the ordinary dividend.

Obviously this isn’t guaranteed — no dividend ever is — but it would mean I’d receive five payments per year rather than the normal four the firm pays. Any special dividends would be on top of my £500 a year in passive income.

If I didn’t already own the stock, I’d add it to a well-diversified income portfolio today.