How I’d invest £20,000 today for a £1,119 passive income

Inspired by Warren Buffett and Sir John Templeton, Stephen Wright thinks the property sector could be the place to investor for passive income right now.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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A Stocks and Shares ISA allows UK investors to invest up to £20,000 per year without having to pay tax on capital gains or dividends. This can be a great way of earning passive income.

Right now, I think the stock market is offering some really good opportunities in income stocks. So if I had a full ISA contribution limit to put to work, I’d look to seize moment.

Finding stocks to buy

The best investors share a common approach. Sir John Templeton called it buying when others are despondently selling, while Warren Buffett calls it being greedy when others are fearful. 

However we put it, the investing greats have always been willing to go looking for stocks to buy in areas of the market that are unpopular or out of fashion. This is where the bargains are.

At the moment, the most obvious example is real estate. Riing interest rates have been making borrowing costs more expensive and driving down demand in the property market.

As a result, shares in companies that lease properties to tenants have been falling. And lower share prices mean higher passive income from dividends.

Industrial properties

After a huge boom during the pandemic, warehouses and industrial distribution centres have seen their prices come back down to earth. I think there are some great opportunities here.

Warehouse REIT and LondonMetric Property are two that stand out to me at the moment. At today’s prices, they offer dividend yields of 6.3% and 5.05%, respectively.

Interest rates went up again this week and this remains the biggest risk with these stocks. But the e-commerce tailwind behind them is still there, so the outlook for both looks positive to me.

Healthcare properties

It’s not just warehouses, though. Primary Health Properties specialises in primary care facilities and the 6.28% dividend yield is attractive from a passive income perspective. 

The company is also exposed to a promising trend. With the Prime Minister prioritising the reduction of NHS wait times, I think demand for PHP’s properties is likely to remain strong.

In my view, the biggest risk with PHP is the amount of debt it has. But its NHS contracts give it good earnings visibility and (in my view) go some way to offsetting this risk. 

Beyond the UK

It’s not just the UK where property prices have been under pressure. Investing in some US property stocks could bring diversification both in terms of geography and industry.

Shares in Federal Realty Investment Trust, which leases retail properties, currently come with a 4.76% dividend. The rise of e-commerce presents a risk here, but Federal Realty has a response.

The company’s properties are concentrated in desirable locations, making retailers more likely to close stores elsewhere. And 55 years of dividend increases indicate that this strategy works.

Dividend income

If I were looking to invest £20,000 for passive income, I’d split it evenly between these four stocks. With an average dividend yield of 5.6%, that would result in a return of £1,119 per year.

Dividends are never guaranteed and payments can go down as well as up. But I think now is a rare opportunity to enter the property rental market with some attractive prices on offer.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended LondonMetric Property Plc, Primary Health Properties Plc, and Warehouse REIT Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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